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Business cash flow is vital to the health and longevity of your company. Even if you’ve got a million-dollar idea, it won’t go anywhere without money to sustain it. You also can’t calculate your cash flow with a single number. Instead, you must add together your financing, operational cash flow and investment money to get a clearer picture of how much you have on hand to run your business.
One main figure that falls under the umbrella of operational cash flow is the money from your accounts receivable. A challenge is that 80% of small to medium-sized enterprises (SMEs) often receive delayed payments. Any amounts tied up in unpaid invoices aren’t counted as physical cash flow until you have the money in hand. With that information in mind, it should be apparent just how big a role accounts receivable plays in your business cash flow. Here’s why you need to stay on top of these numbers and revamp your cash flow management strategies.
Keep tabs on accounts receivable
Tracking your Accounts Receivable (AR) is always a good idea. Otherwise, you might look at your available cash and think the number is unexpectedly low — if you know you have a big payment on the horizon, though, you can rest assured the money’s on its way.
Until you receive these payments, you cannot consider them part of your business cash flow. Therefore, it’s vital to chase your accounts receivable and ensure the money comes in — otherwise, you might find yourself entirely beneath the benchmark of the amount of cash flow you need.
Balance your accounts receivable with accounts payable
We’ve already touched on what accounts receivable are. Your accounts payable are all the bills you’re obligated to pay. Just as you give your customers a window in which to send their money, you, too, are on the hook for your rent, utilities, office supplies, etc.
There can be a clash between these two figures if you’re not receiving your accounts receivable in plenty of time to take care of your accounts payable. If your accounts receivable turnover ratio is too high, you might find your cash flow completely strapped when it comes time to pay off your pending accounts payable. A slimmer repayment window for your accounts receivable could be the solution to your problematic accounts payable process — in fact, it could save your business.
Outstanding accounts receivable can slow business cash flow
We can’t reiterate enough just how much your burgeoning business depends on cash flow. Without it, you won’t be able to grow your company along with trends, demands, technological updates, etc.
Imagine, for instance, an updated software that can make your job more efficient and straightforward — boosting production and lowering the cost of making your goods. Without enough cash on hand, you can’t pay to upgrade your computers and improve your workflow. With tighter reins on your accounts receivable, though, you might have this money available to keep things moving — and growing.
Another tool to be aware of is invoice factoring. It lets you sell an unpaid invoice to a factor (lender), who’ll immediately give you a percentage of the invoice to help boost your business cash flow — and purchase that much-needed software update. Once the factor is paid by your customer, you’ll get the remaining balance minus interest and fees. (Another perk, unlike traditional term loans or lines of credit, the use of invoice factoring isn’t reported to the credit bureaus.)
If accounts receivable gets swept under the rug — so will your business cash flow
What’s your company’s collections policy? How many days do customers have to pay you back? What will happen to them if they don’t? These sorts of questions are not only essential to the health of your company, but to the amount of cash you have on hand, too. A weak or passive debt collection plan could spell disaster for your business.
A proactive accounts receivable process will play right into improving your business cash flow. For starters, prepare invoice payment terms which are beneficial to you and your vendors. Include important guidelines on when and how vendors will have to pay you back. You might want to incentivize early payments or penalize late ones to further hasten the process.
A quick invoice creation process will ensure your clients know as soon as possible how much they owe and when. Keeping an eye on notoriously slow-paying customers is something to add to your to-do list. Some companies also perform credit checks on customers or request a bit of cash upfront as part of their invoicing processes. That way, they have a higher guarantee of their accounts receivable becoming viable income.
There’s always room for improvement
Good news: you don’t have to let overdue payments mess up your business finances forever. By setting up a smart system, you can have enough money to run your business smoothly, pay your team on time, and maybe even grow.
Next, make sure your billing team knows exactly what they’re doing and consider using online invoicing. Proper training means fewer mistakes, faster work, and more money in your pocket on time.
And for an even bigger boost, think about using simple accounts payable and accounts receivable software like Forwardly. It helps you get paid in just 22 seconds and pay your bills without any hassle. With features like instant payments and free same-day ACH, you can get your money in no time and avoid late fees. With automatic payments and seamless integration with accounting software like QuickBooks Online and Xero, you can save time and enjoy peace of mind knowing that your invoices are being settled promptly.
Forwardly only charges a small fee of 1% for receiving instant business payments , with free same-day ACH and bill payments. By tightening up your accounts receivable process and using Forwardly, you can make sure your business stays on track financially.
