Accounts Receivable – Beating The Challenges Of Getting Paid

Having a steady and continuous flow of working capital is critical to the success of any business. Having an effective accounts receivable system can be a major help to achieve this. This guide will provide you with the tools to overcome any obstacles in the accounts receivable process, enabling you to receive payments quickly and reduce cash-flow crunch risks to your business.

In order to maximise working capital, companies often concentrate on streamlining inventory or extending the payment of accounts payable. Even though these are both reasonable ideas, they are tinkering at the edges, can be slow to materialse, and not facing an awkward truth. Making improvements to your accounts receivable (AR) is usually a faster and definitely a safer way to run your business.

Why Is An Improved AR Better?

By definition, accounts receivable is money owed to you but until it is in your bank account, it is at risk. What if your customer is having their own cashflow or account receivables problems? If they cannot afford to pay you, your own business is at risk of some level

Improving your AR is also likely to be faster than trying to liquidate your WIP or finished goods inventory. Accounts are usually due on the 20th of the next month meaning you should be paid within a few weeks,

However, liquidating stock can take an unknown amount of time to generate the cash you want. Further, to achieve a fast liquidation, it is almost inevitable that you will have to sell at a discount thereby lowering your margins.

Is it smart business to sell at a discount while you are leaving your cash in someone else’s bank account?

Trying To Extend Your Terms Of Payment

Some companies might try to get their suppliers to extend their credit terms. This is not a good idea as it sends signals that you do not want to. Firstly, it tells your suppliers that your company is in a weak financial state. Do you want them to think that is the case? Of course not.

Secondly, if the believe that you have financial problems, they are unlikely to be as favourable with you. The price discounts you had will be reduced, your payment terms may be shorter, perhaps even a COD basis.

Thirdly, why put your business in a bad light when the fault is another party i.e. your delinquent customer? You are not only letting your late-paying customer off the hook, you are also damaging the reputation of your company.

An Awkward Conversation

Improving your AR will in many cases require you to ask your customer to pay late invoices. It is a conversation few people want to have as they think it will impact future relations with that customer. However, it is a conversation that needs to be had. You need to set the tone for current and future terms of business.

Three Ways To Improve Your Accounts Receivable

Now we know why reducing inventory or seeking to extend your own payment terms are not such good or fast ways to improve cashflow, what can you do?

1 Day Sales Outstanding (DSO) Or Days Receivable (DR)

The first step is to measure and review some key measures for cashflow or working capital.

A common measure is Day Sales Outstanding. DSO is a simple measure of the number of days it takes a supplier to get paid for that level of business.

It is simple to work out your DSO. Divide the AR for the month by the sales for the same month, and multiply that by the number of days in the month. Even though it is a simple piece of arithmetic, your accounting package will probably have a report to show you this.

You want to have a low DSO figure as this shows you are collecting cash quickly.

Once you know your DSO or DR, then you can decide if it is a problem or whether you need to look at the inventory sale or asking to extend the payment terms with your suppliers.

2 Poor Accounting Systems

If your accounting system is like the proverbial shoe-box of receipts, you will not have a grip on your cashflow or your working capital position. Some companies do have accounting systems but they are often not integrated.

While the sales department is out hustling for orders, the AR team might not be aware of the payment terms the sales are offering. This disorganisation leads to confusion, poor relations between the departments, and onwards to customers.

If a customer is a repeat poor payer, it is imperative that the sales people know this and take that into account when negotiating deals with those clients.

3 Bad Communications With Your Customers

Too many salespeople think that asking customers to pay outstanding bills will sour relationships with the client. However, if the customer is reliable, in a strong position, and values supply chain relationships, they will know that it is important that their suppliers are in a good financial position. It is highly likely that your customer’s AR team will be pressing their suppliers for payment so why shouldn’t you?

Secondly, as a salesperson, do you want to keep supplying a financially weak customer? That doesn’t seem like a good longer-term sales plan.

Do not be afraid to have that assertive conversation with your customer’s accounts payable team, restating the terms of your contract and their obligations to settle their bill.

The easiest way to make sure that you are paid on time and to avoid awkward conversations, is to discuss payment terms when negotiating the deal in the first place. Robust, and agreed payment terms are part of the contract between our two companies. Clear communication at the beginning of the trading relationship will remove any room for doubt, delays, and discomfort. This will help to build a strong, mutually respectful relationship than can endure over the coming years.

Two Simple Ways For Faster Cashflow

Sometimes, even after these internal improvements, there maybe times when you want to get your invoices paid faster to improve your working capital. You may have a big supplier invoice to pay for example.

Rather than going to the bank, especially if your cashflow need is only short-term, there are other options open to you.

Two of the simplest and fastest methods are to get a portion of your AR paid faster by a third-party, or to get a short-term business loan.

Getting some of your AR paid sooner is a simple as selling an invoice(s) to a finance company that pays you overnight. The financier then collects from your customer when the payment is due. This is known as invoice finance.

The second option is more well-known and is simply getting a loan from a finance company. These days banks can be slow and difficult to work with. Instead look to a business-to-business finance company like Fifo Capital and we can organise business loans in New Zealand one or two days.

Summing Up Accounts Receivable Problems

We have seen that having an AR system in place is essential to the financial well-being of your company. An accounts system that is integrated with the sales systems will improve communication and understanding among your staff so that all internal teams can appreciate the problems of poor AR management.

The AR system needs to measure the key indicators in a simple but reliable way so that the staff can easily understand the position that your business is in.

Once they know the numbers, they can act accordingly. This can be either recovering outstanding debts, or better still, having better conversations at the start of the sales process so that the late payment situation doesn’t arise in the first place.

If these sensible and sound business practices are put in place, it is unlikely that you will need to try to reduce your inventory by selling at a discount or damage your own reputation with your suppliers.

Alternatively, you can arrange short-term finance which is both faster, and avoids any damage to your reputation.

For more information, contact Fifo Capital on 0800 863-436 or [email protected].