Cash is King:
Seven Ways A/R Can Improve Cash Flow Today

Those that master this act gain control of their company’s working capital, operating costs, and earnings. Equally important, this control enables them to deftly weather financial crises. Given the larger importance of cash flow during economic downturns, strategizing ways to remain stable, preserve finances, and emerge strong is critical.

Even mid- and post-pandemic, it is not too late for companies to develop a plan for ensuring optimal cash flow and long-term financial health. Here we are providing seven actions that finance teams, especially A/R and A/P, can take today to optimize cash flow for the future.

It is difficult to know where you are going without some guidance.

Financial forecasting is the roadmap most companies follow to reach stated goals and objectives. The cash flow forecasting process forces management to quantify sources of revenue and cash, uses of cash, and serves as a barometer of whether expectations are materializing.

Effective forecasting includes regular updates that highlight areas where changes are needed for adjustment to or expansion of current budgets. Being part of the forecasting process provides A/R and A/P teams insight into the effectiveness of their collections and payment policies and processes.

Begin by asking where is your company spending money?
How can we lower costs and save more?

It is useful to consider the benefits and drawbacks that certain expenses can have. For companies who rely heavily on paper-based A/R and A/P processes, electronic invoicing, payments, and automation are proactive steps toward lowering costs while improving efficiencies, which will help prevent cash-flow shortages. Paper-based processes cause challenges for both A/R and A/P teams looking to quickly, effectively, and affordably process invoices and payments.

A/R teams that have gone from manually creating, printing, and mailing invoices to electronic distribution have benefited from cost reductions in paper consumption, postage costs, and labor. Folding automation into the mix can improve the benefits further. Indeed, taking into account both hard costs

(such as paper, ink, envelopes, and stamps) and soft costs (costs associated with labor), electronic invoicing averages of 59% savings per invoice, according to Billentis. Taken a step further, Billentis points out that automated e-invoicing can result in cost savings of 60% - 80%, in most cases. Moreover, automation alleviates administrative burdens, giving teams extra bandwidth to address critical customer service issues, which enhances relationships.

Similarly, A/P automation resolves a number of manual shortcomings that result in cost savings. According to the Aberdeen Group, the average paper check transaction costs customers $7.15 to process and pay versus a range of $3.96 to $4.72 for electronic payments including ACH and P-cards, for a cost improvement of 34% to 45%.

Real cost savings for any collection process can be realized through the adoption of electronic invoicing and payments, as we mentioned above.

Electronic solutions also bring the benefit of flexibility and instant communication, which are especially convenient with reminders and late notices. When the economy slows, it is important to stay on top of collections and know where money is owed. Here are a few suggestions to accelerate collections:

• Send electronic reminders prior to invoicing

• Send payment requests to multiple customer contacts at once

• Consider offering payment plans or partial payments for late balances

• Sent late notices to remind customers of late invoices

• Offer electronic payment options to increase convenience and reduce friction

• Offer electronic statements to provide real-time account status

• Be flexible and empathetic, focusing on building strong, long-term relationships

Cash is the lifeblood of businesses, and late or slow-paying customers put this at risk.

Consider implementing payment plans to help recover as much cash as possible from customers experiencing cash flow issues. In addition to providing insight into customers’ financial health, payment plans help manage risk to future revenue and bad debt exposure.

Dynamic discounting is a powerful tool that can benefit cash flow for both vendors and customers.

Generally, credit terms allow a 30-day grace period after receiving an invoice. Dynamic discounting offers early payment incentives, such as 2/10 net 30, that allows a customer to take a 2% discount if they pay within 10 days of invoicing.

From a vendor perspective, dynamic discounting is a way of accelerating cash flow. It can also be used to encourage electronic payment adoption, which brings its own cost benefits (see point 2 above). From a customer perspective, dynamic discounting represents an easy way to lower expenses, which is why it should be taken advantage of as often as possible especially in an environment where cash in the bank earns less than 2%.

6. Accept Credit Cards

An evolving market shows that more and more customers are looking for options that increase convenience while decreasing cost.

With credit cards, customers can easily pay invoices within a matter of minutes. Less hassle and friction for the customer means an increased probability of on-time payments. While many companies are hesitant to accept credit cards because of the fees involved, advantages such as faster payments, reduced DSO, and increased working capital can outweigh these costs.

7. Consider a Business Line of Credit

A line of credit may offer an option that fits the needs of your company, especially for businesses that face unexpected expenses.

Maintaining reliable cash flow for your business when customers can’t pay on time can be tricky, but businesses gain greater control and flexibility by having a line of credit at their disposal. Credit lines provide additional benefits such as an opportunity to establish a strong banking relationship and improving credit ratings.

Financial flexibility is always critical, even more so when the economic environment is unclear. Through effective, continuous cash flow management, companies can plan accordingly and navigate successfully through various economic cycles.

Developing a good planning process can help you adjust quickly to economic changes, adjust your expenses, and find solutions to maintain healthy cash flow.