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Why is accounts Receivable Management Important?

by Uneeb Khan
Accounts Receivable Management

A constant pandemic means that cash flow management is essential to all organizations, big or small. The best way to manage receivables for businesses is to turn them to cash as quickly as possible. This is where accounts receivable Management comes into.

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A brief review of the Receivables and Accounts Receivables


The majority of people are aware of receivable as the term for “the amount of payment not received.” This means that the business has provided credit to its customers. Accounts receivable is the amount of monetary value that a company sells its goods and services, and also has the rights to receive it after a certain period.


If a business does work for the customer Y then the client Y owes the company money. This is known as accounts receivable. Credit period typically ranges from a month to a full year.

Importance


Accounts Receivable is a major component of any business’s assets. It is crucial for creating cash flow in the books of the company. This is important since it impacts the cash flow of the company in future. Credit facilities are offered to customers to make it easier for them to make transactions and build solid credit relationships with them. This allows the company to get better deals. Investors are attracted because they can check the company’s collection efficiency and decide if they want to invest.

The ability of a business to control its accounts receivables can make or break it. If a customer delays paying, the business is likely to be in an emergency situation with cash flow. The company eventually goes into insolvency and cannot pay its bills.

Experts agree that 90% of businesses shut down unexpectedly due to problems in their cash flow system. Cash flow shortages can often be caused by badly controlled receivables.

The prevention of these pitfalls is crucial for any business. Therefore, it is essential that they effectively manage their accounts in order to improve working capital and avoid cash flow issues.

Every business wants to to purchase cheap and sell it well. However, they risk that everything will be lost when their management of accounts receivables does not improve by the end stage, i.e. when payment is made. Insufficient management of receivables accounts has been the main reason behind over half of bankruptcies. It involves more than just reminding the client to pay on time. It also consists of discovering the reason why the customer has not paid and also the loopholes in the system because of the reason that the customer skipped the step. This could be due to an administrative error or because the product or service was not delivered.


The correct control of receivables in businesses is based on the following components.

  • Determining the customer’s credit rating in advance
  • Monitor and scan customers often for credit risk
  • Maintaining positive customer relationships
  • Detecting late payments in due time
  • Detecting complaints in due time
  • Reducing your total balance
  • Avoiding bad debts in outstanding accounts

Tips for efficient accounts receivable management


These might seem like fairly common methods, but a shocking amount of businesses don’t adhere to these rules. This is why we created the following checklist:

  • Do not give credit to anyone:


It is essential to conduct a credit check and verify the identity of a client on the credit market prior to agreeing to do business. The majority of corporate clients have credit accounts on their own. They must offer all the required details prior to doing business without much ado. It is acceptable to deny credit and to request payment upfront.

  • Get a Personal Guarantee:


When doing business with corporate customers, it’s important that you ask for an individual guarantee on your credit agreement. This covenant will verify the authenticity of the relationship and will ensure that the payments are made on time.

  • Terms of Payment for the First Order of Business


When you begin business with a new customer, it is essential to record all payments in written form. Tell the client in detail about the payment due date and late fees, interest terms, and other details.

  • Send invoices promptly:


This is often ignored or overlooked. If the client does not receive the invoice on time, it is not possible to expect the payments on time. Automatizing the process of sending invoices is essential to ensure that invoices are delivered quickly and effectively.

  • Customers have Easy Payment Options:


The statistics show that consumers will pay two times as quickly for easier and more convenient payment options. With an ever-growing user base, mobile payments can be a viable payment option. Due to their convenience, platforms like Google Pay as well as PayPal will bring faster payments for businesses.

  • Pay close attention to payments received:


Every day, check the receivables to make sure that you’re paying all the bills. Report any discrepancies.

  • Plan for Past Dues:


Customers who are in arrears with payments or owe money should be dealt with strategically. Think about all sorts of issues like how many days past the due date the late fee will be assessed, the amount of interest to levy, or how to let the customer know the information in writing, by phone or email, and other issues.

  • Conformity with Rules:


It is important to stick to the plan you have for managing your accounts receivables. You can’t change the way you handle each situation. Taking the steps that you have pre-planned for each situation will simplify your task with a great deal and improve the adherence of your customers.

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  • How to remove a customer:


Customers who are always late with their payments can cause more damage than good for your company. Consider the risk of future non-payment or non-compliance, and take the appropriate actions. Consider the risks to cash flow and weigh the cost against the potential benefits of the relationship for the customer. It is recommended to end the relationship with the client at this stage. However, if it’s not easy, consider reducing their credit limit or requesting a full upfront payment.


Due to its ability reduce bad debt, good receivables administration will directly improve your business’ profit. You will have a higher cash flow and more liquidity to fund your investments and acquisitions. An effective management of accounts receivables will enhance your business’s image on the market. Invoicing, monitoring and collection are the main components of managing receivables. Any business should ensure that these steps are checked when carrying out their work and other tasks to ensure a secure future.

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