Accounts Receivable Guide to Managing Cash Flows
There is a direct relationship between your firm’s growth and its working capital requirement. As your sales grow, your level and composition of working capital, namely, Inventory, Receivables, Cash, Payables, Short Term Loans etc. will also change. Accounts Receivables (AR) is one of the major components impacting the requirement of working capital. AR is a result of sales made to the customers on credit. A business can benefit from selling its goods and services on credit, thereby resulting in increased profits but at the same time, credit sales act as a stumbling block of funds and there can also be a possibility of bad debts due to defaults in payments by the customers. Therefore, it is essential for the business to carefully analyze and invoice on credit only to its reliable customers.
Accounts Receivable Outsourcing involves ensuring timely collection of dues from its customers and managing the whole process in an organized and professional manner. AR helps in analyzing deeply the overall health of the business.
Some of the issues faced by businesses today make a compelling argument in favor of outsourced AR management.
- Despite of rigorous follow ups with the customer, sometimes the business ends up writing off the bad debts since the employees do not find them worth their time.
- It happens that you decide on aggressive collections say during a quarter or year-end but end up denting the relationship with some customers.
- Lack of professional awareness on managing working capital issues hampers day to day operations. While everything looks good in terms of incremental sales but slow recovery ends up hitting your profitability.
- A lot of money parked in accounts receivable reflects on poor business acumen. Investors or lenders do not find such businesses attractive thus hitting your growth and expansion plans.
- Increased cost of funding from the banks in the form of Over Draft or other Working Capital Loans because of blockage of funds in working capital.
- Frequent cash squeezes making it difficult for you to honor your financial commitments thereby impacting your credit worthiness in the market.
Conclusion- Good account receivable management is the life blood if not the heart or brain of one’s operations. Poor account receivable management along with other factors have led to falling of great enterprises and with laws such as the Insolvency and Bankruptcy Code in place, it is better that we have the cash flowing and never dishonor on outstanding commitments.
AR management is a professional process which helps you strengthen your receivable position and broadly includes the following activities;
- Assessing the customer’s credit rating.
- Advising on matters relating to supplier contracts, invoicing and bookkeeping.
- Help reach a balance where customers’ needs and the firm’s credit policy are in line.
- Making recovery faster while maintaining good customer relations ensuring a more collaborative environment.
- Ensuring Bad Debts are detected in timely manner and advising on ways to mitigate risks leading to ‘debt turning bad’ situation.
- Timely scanning and monitoring customers for credit risks.
- Entertaining customer concerns.
- Collection Management.
Some tangible benefits that do arise on outsourcing AR Management include but are not limited to the following;
- Strong financial position which leads to increased credit worthiness and decreased financing cost.
- Receive a summarized report on AR position and recovery with a review of Service Level Agreement (SLA) matrix, performance and Turn Around Time (TAT) compliances.
- Shortening Payment terms.
- A Standard Operating Procedure on Bill Dispute Resolution Process.
- Proactive approach to AR management including early intervention to decrease the amount of avoidable write offs.
- Increased promoter/senior management efficiency because the time is now allocated to vital activities necessary for growth and smooth operations.
- Faster recovery of funds and efficient allocation to short term investment avenues such as Government Bills leads to increased Return on Funds or Capital Employed.
- Time to Time advisory and consultancy relating to good AR management practices.