Establishing efficient accounts receivables process is crucial for the effective management of working capital for small and medium enterprises. The information generated from these processes is important to the management of cash flow and liquidity needs of a business. If the organization has a high volume of transactions in accounts receivable, it makes sense for the company to pursue process improvements, standardization, integration and automation.
The Need for Positive Cash Flow
Accounts receivables represent the sales of the company which have not been paid. They are recorded as sales transactions but payments are still pending. A product or service has been sold but the company did not receive cash as payment. A high volume of accounts receivables are usually common for a company accepting purchase orders and credit card payments. When a company has several accounts receivables, this means an outflow of funds. A business needs a stable cash flow to generate working capital and profits.
In small to medium enterprises, the role of the owner or financial manager is to collect all the money owed to the business as quickly as possible. This must be done while continuing to offer attractive credit terms to customers in order to increase sales. The management of accounts receivables entails setting up reasonable credit policies including repayment conditions. To motivate customers to pay their bill earlier than the due date, the company can offer an incentive or discount. Customers are more likely to pay earlier to take advantage of the discount being offered.
Evaluating Credit Policies
A balance must be achieved between providing customers with generous credit terms and easier credit policies. Before deciding to offer longer credit terms to keep customers happy, the firm must evaluate the current status of its working capital. If the business can afford to carry accounts receivables for an extended period of time, longer credit terms may be offered. The company should base its credit policy decisions on customer profile, timing of cash flow, risk of bad and credit industry standards.
To evaluate the current financial performance, the firm must determine its Days Sales Outstanding (DSO). The DSO is the average number of days of accounts receivables. A high DSO means that the firm takes too long to collect outstanding receivables. Maintaining the liquidity of the business is critical to be able to operate effectively. Some companies choose to train employees in debt collection and credit policies. Employees will know the importance of reducing DSO. Improving a company’s collections process means high liquidity for working capital.
Acquire Information Systems Technology and Outsourcing
The development of financial technology systems and electronic systems has made it easier for companies to monitor their accounts receivables. The automation of accounts receivable processes can bring many benefits such as enhancement of customer experience, increased productivity and employee morale. The financial performance of the company will also be significantly improved with the optimization of accounts receivables. Outsourcing financial and accounting processes is also an option for firms that find it difficult to develop their own systems. The firm should be willing to take the risk of transferring sensitive data to third-party service providers.
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