Best Practices for Managing Account Receivables in Growing Businesses

Account receivables can pose a significant challenge for growing businesses. When clients make purchases but do not promptly settle their bills, it can create a large cash flow deficit, leading to potential financial crises. Proper management of account receivables (AR) is essential to ensure a steady cash flow and maintain business sustainability. In this article, we explore best practices for managing account receivables, including key metrics like DSO, credit policies, and follow-up procedures.

Understanding DSO (Days Sales Outstanding)

The Days Sales Outstanding (DSO) is a critical metric for evaluating how efficiently a company collects its receivables. DSO measures the average number of days it takes for a company to receive payment after a sale is made. A higher DSO indicates slower cash collection, which is a red flag for cash flow management. Lowering DSO can significantly improve cash flow and liquidity. Typically, a DSO of 15 to 45 days is considered ideal, as it balances revenue recognition and cash inflow.

Setting Credit Policies and Customer Track Records

To effectively manage account receivables, companies must establish clear credit policies. The amount of credit granted to customers should be based on their creditworthiness, historical payment patterns, and relationships with the company. Maintaining detailed customer track records can help in making informed decisions regarding credit terms. It is crucial to have a systematic approach to record the payment history, credit limits, and any delinquencies of each client.

Categorizing Account Receivables

Proper categorization of account receivables is another effective strategy. By segmenting receivables based on the age of the invoices (current, past due, and older), companies can easily identify which clients are most likely to pay late. This allows for targeted follow-up actions and helps in prioritizing payment collection efforts. Regular reviews of these categorized receivables can provide insights into payment trends and inform credit policies.

Implementing Effective Follow-Up Procedures

When payments are outstanding, timely follow-up is essential. Initial steps should include phone calls and reminders, followed by written correspondence. If these initial steps do not prompt payment, more assertive measures can be taken. Engaging with business line managers who have the authority to approve payments can provide crucial insights into the reasons for delayed payments. This can include:

Understanding customer satisfaction with the product or service Identifying any integration challenges Offering training and engagement opportunities Recommending additional or replacement solutions

For instance, if a major client experienced a reorganization, the DSO might increase significantly. In such cases, proactive engagement with key decision-makers can help resolve issues and clear up outstanding invoices. This not only improves cash flow but also enhances customer relationships. A dedicated account receivables team can handle these follow-up procedures efficiently, ensuring that payments are collected in a timely manner.

Conclusion

Managing account receivables is crucial for the long-term success of any growing business. By implementing effective DSO metrics, credit policies, and follow-up procedures, companies can ensure a stable cash flow and avoid potential financial crises. Proper management of account receivables not only improves cash flow but also strengthens customer relationships. Consider hiring a dedicated AR team to handle these tasks, as it can be an enormous opportunity to gather valuable information and enhance overall business performance.