The surprising role of accounts receivable in business success

 In Accounts Receivable Factoring, Alternative Financing, Business Services, Finance Highlight

The role of accounts receivable in a company’s success is often underestimated. Sales, marketing, and product or service delivery are seen as revenue generators, while accounts receivable is seen as a business cost. 

Stephanie Moses, Account Manager at AR Funding, an invoice factoring company, has a different perspective. In her experience, accounts receivable is a way to manage, predict, and optimize a business’s cash flow. 

“If you do it right, it gives you a window into your company’s financial health that you can’t get from any other source.”

She listed four ways the accounts receivable function has a direct impact on company success.

1. Cash flow

The health of a company’s accounts receivable directly impacts the company’s cash flow and its ability to fulfill its financial obligations. When you have someone monitoring and managing the inflow of cash, you can take timely action to address fluctuations or unexpected delays. 

2. Business costs

A proactive accounts receivable function can reduce business costs by ensuring that payments are received on time and in full. That, in turn, can enable your company to take advantage of any early-payment discounts offered by your suppliers, prevent late-payment penalties, or reduce interest payments on business loans, lines of credit, or business credit card balances. (Learn more about how payment delays can inflate the cost of doing business by reading 3 Ways Small Businesses Leave Money on the Table.)

3. Business planning

A good aging report on accounts receivable not only helps you see how much cash is flowing into the business today, it also helps you to predict future cash flow accurately using historical data. This makes it easier to plan for sustainable growth or weather financial hardship.

4. Customer experience

Accounts receivable is an important customer touchpoint. When it is not managed effectively, it can impact the customer experience and negatively impact the way customers evaluate the company’s professionalism and trustworthiness.

However, Moses pointed out that accounts receivable can only deliver business benefits when it is resourced and managed appropriately, and research suggests that many companies may need to improve the function. According to Versapay, more than 80% of C-suite executives at large companies say they have lost revenue due to miscommunication in the invoice-to-cash cycle, and nearly three-quarters (73%) believed that the invoice-to-cash process can negatively affect a customer’s experience.

According to Moses, there are six things businesses can do to create a best-in-class accounts receivable department. 

1. Get the right people in place 

A good accounts receivable department starts with the right people. They don’t necessarily need to have a background in accounts receivable, but they do need record-keeping experience, preferably in a regulated industry, such as banking or healthcare.

“They need to be detail-oriented,” explained Moses. “If you ask them about something that happened last year, you need to know that they can pull the record for you and verify the transaction.”

2. Cross-train your people

Moses urged companies to ensure accounts receivable can function smoothly by cross-training team members, even—or especially—if the department is run by a team of one. Whether someone is on vacation, sick, or has chosen to move on from the company, accounts receivable can’t be placed on hold, even for a day, without impacting company financials and team morale. 

“Once your monthly recurring revenue reaches $100K, you need to start cross-training,” Moses said. “That back-up person doesn’t need to be fully trained, but they need to be able to step in and take care of the basics, at a moment’s notice.”

3. Invest in a software system

A business can’t achieve the required level of visibility and control around accounts receivable using email and Excel. A dedicated accounts receivable platform will pay for itself many times over by enabling the company to accelerate and maximize cash flow. With so many excellent platforms on the market, Moses recommends ignoring reviews and focusing on the specific needs of your organization. 

“Start keeping notes of the challenges you currently face in your accounts receivable processes,” she recommended. “Once you have an idea of the problems you need to solve in your workflows, start reaching out to vendors and finding out whether their software addresses those specific issues, and if so, how.”

The only non-negotiable element, according to Moses, is the user-friendliness of the system. If it’s not easy to use, it can make cross-training harder, and it can also prevent executives from being able to log into the system to find the financial information they need. 

4. Establish repeatable processes

Predictability is one of the most important elements of an effective accounts receivable function. Accounts receivable needs a consistent rhythm and clear expectations based on established timelines so that money arrives predictably and everyone in the company can rely on the financial information they need to be available and reliable. 

Consistency is especially important for businesses with loans and lines of credit that involve non-negotiable banking timelines and loan covenants. In these cases, even a minor oversight can result in costly repercussions.

5. Get aging reports up to date

Aging reports are an essential tool for accounts receivable, but they are also one of the most valuable contributions the function makes to the organization. With an aging report, your company can:

  • Generate P&L sheets that show you how much money is owed to your company
  • Ensures you haven’t left money on the table by forgetting to send or collect on an invoice (a very common occurrence!)
  • Predict cash flow by analyzing payment trends
  • Calculate the added interest costs of late payments on business loans
  • Identify opportunities to generate more cash by establishing penalties for habitually late-paying customers
  • Accelerate cash flow by offering early discounts to select customers

6. Hire a 3rd-party accountant

Moses also recommended hiring an independent accountant to review the company’s accounts receivable, ideally on a monthly or quarterly basis, or, at a minimum, annually.  

“Business tax laws change exponentially,” she explained. “Having someone with that specialized expertise and background is well worth the cost.” 

A certified professional accountant (CPA) can not only help you avoid or mitigate the impact of an audit, but also ensure that you take full advantage of any write-offs. Getting an external set of eyes on the company’s books also protects the company from the risk of fraud.

“The more people that are in the loop and have access to the information, the more likely any errors and inconsistencies will be spotted,” Moses said.

Maximize revenue

For companies of every size, accounts receivable plays an integral role in ensuring that companies receive the revenue it has worked so hard to earn—on time and in full. By allocating the right people, processes, and technologies to the function, you can create more predictable cash flow now and plan more efficiently for the future. 

Looking for more ways to improve your business cash flow? Take a closer look at invoice factoring.

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