accounts receivable cash flow

Deloitte's advice to CFOs: How to optimise accounts receivable for more working capital

By mihiri Sep 26, 2018 Comments

Global financial advisory service, Deloitte, says cash is not only king, it’s critical. In its working capital series, Deloitte highlights four core areas to optimise so a business’ cash position improves: accounts receivable, accounts payable, cash management and inventory. Companies that free up the cash trapped in the balance sheet can improve operational efficiency, fund growth and outperform competitors, says Deloitte. Here, we summarise Deloitte’s key strategies to optimise accounts receivable.

Accounts receivable - collect money efficiently

Your payment culture is key to whether your accounts receivables promote or hamper good working capital. Despite having policies and payment terms in place, companies that focus on sales at the expense of working capital can fall into the trap of unintentionally providing customers with free financing.

Risks to accounts receivable include the following:

  • Failing to follow up when invoices become overdue
  • Extending credit to bad credit risk customers
  • Allowing sales representatives to override credit limits for customers
  • Staff not adequately trained to deal with late paying customers
  • Inaccurate invoicing
  • Poor visibility on outstanding payments

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Five accounts receivable activities to optimise

  1. Customer credit approval
  2. Collection process
  3. Customer Master Data
  4. Invoicing/billing
  5. Cash application process

1. Credit approval

Determine your credit policy with input from the sales team so that your payment terms reflect market expectations and make sense for the business and its customers. Your policy should include items such as when to grant credit, when to put an account on hold and situations when credit limits can be overridden.

Decide how you will assess credit risk: you can determine credit worthiness with your own internal scorecard based on assumed risks, or for larger volume buyers, you can purchase a full credit history report for an extensive background check on your new customer.

Agree on a timeframe to approve or reject credit limit applications. Without a timeline, these applications can lapse and sales teams can lose potential business as they wait for approvals. You might first approve credit to new or high risk customers for a short period, then review again.

Set indicators for when credit terms should be reviewed. You might have a regular time frame for reviewing all credit limits, or you might review credit customers based on their industry. For example, in declining economic conditions you might review those customers in industries most at risk of cash flow problems.

2. Collection process

To collect on time, be proactive. A proactive collections process relies on accurate data so that collections staff can be sure which invoices are collectible and which are in danger of becoming delinquent. A few tips for best practice collections:

  • Your collection efforts should be consistent and frequent, supported by up-to-date data so you know which accounts are overdue.
  • Train staff so they know how to collect amounts owing from recalcitrant customers
  • Negotiate payment plans that align to your collection policies
  • If offering discounts, ensure they benefit the company too, and are implemented accurately
  • Strengthen processes to permit accurate reporting
  • Automate processes to avoid manual entry errors

3. Customer master data

Avoid data glitches by centralising customer data and allocate someone to be responsible for its management. Because your overall accounts receivable process depends on reliable and current data, ensure your system records each customer’s details:

  • Credit limit
  • Payment terms
  • Contact details such as delivery address and email address
  • Volume discounts that apply

Spend the time to conduct regular audits of master data to identify customers whose activity is a risk to cash flow.

4. Invoicing/billing

Errors or omissions in invoices and failing to issue invoices quickly contribute to a late payments problem. Without a systematic process, the invoice-to-cash process unnecessarily lengthens as bills bounce back and forth or team members bill outside the system. The following strategies are designed to establish a billing process that ensures accurate invoices are sent on a timely basis:

  • Automate the invoicing process to reduce time and human error
  • Digital invoices can reduce delivery time and customers can easily transfer them directly into their accounting software
  • Flag account anomalies with exception reports that alert to sales exceeding credit limits, excessive discount rates etc.
  • Offer a customer portal to reduce manual hours dealing with cash applications, disputes, collections etc.

5. Cash application process

Apply customer payments to the right invoices in the right account in a timely manner. While this may seem straightforward, companies persist in getting this wrong, and waste time and resources during the collections phase figuring out which accounts are current and which are outstanding. To avoid errors and delays:

  • Allocate payments to the appropriate  invoices rather than the oldest invoice or simply crediting the customer account
  • Do daily reconciliations to maintain an up-to-date system
  • Post journal entries well before system cut-off dates

A final word: Deloitte advises finance managers to audit their current accounts receivable processes then determine best practices and industry norms to target. From there, determine an action plan to close the gaps.

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accounts receivable cash flow

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