How to Decrease Accounts Receivables and Increase Cash Flow

Every accounting firm seeks for ways to enhance the accounts receivable process as it affects a wide range of business elements including purchasing and marketing.

Understanding How to Decrease Accounts Receivables and Improve our Cash Flows

For most businesses, cash flow is an unrelenting concern with lack of capital being among the biggest problems. Having the right accounts receivable processes will improve operational efficiency, streamline the invoice creation and increase cash flow, while ultimately enhancing the customer experience. Here is how you can have a decrease in account receivable cash flow!

What Causes Accounts Receivable to Decrease?

Before delving into how to reduce accounts receivable, it is important to know what it is and what causes accounts receivable to decrease. Even though the term used here is ‘decrease’, it has a positive impact on the company. An increase in AR (Accounts Receivable) means that a company’s sales are paid with credit instead of cash. On the other hand, a decrease in accounts receivable means that the company successfully retrieves cash for credit procurements. All these are entries made in a journal and hugely dictate a business’ finances. 

7 Ways for Efficient Cash Flow Increase in Accounts Receivable

1. Give Incentives to Early Payments and Penalize Late Payments

One of the best strategies has to be giving clients discounts if they pay on or before the provided due date. Most people are in the business of saving money and if it means paying early, they will do it. Giving them incentives gives them a chance to save some money while still ensuring that their cash flow is uncompromising.

On the other hand, if a customer is late, consider hitting them with interest charges or late fees. While it is not the best thing to do, it still works as an incentive for them not to pay late. You only need to ensure the timeframe is reasonable so they do not feel rushed. For instance, if your business gives a payment timeframe of 30 days, consider adding them an extra 10 days past due before you can penalize them. This will give them ample time to pay before the late fees apply thus causing a decrease in account receivable cash flow. 

2. Report Customers’ Payment History to Credit Bureaus

People care about their credit statuses. This is because it affects their ability to get loans and credit lines, and even do business with particular partners. But how does accounts receivable affect cash flow? Whether you are in the B2B or B2C industries, having good credit makes you stand out from your competitors. With this knowledge, you need to start reporting your customers to credit bureaus. It will act as a motivation for them to pay you on time thus decreasing AR (accounts receivables). 

For you to begin reporting your clients to credit bureaus, you need to communicate it properly (in plain sight) and upfront. The most ideal way would be incorporating it into the company policy and keeping the records of the same. Let them know that if they are consistently late their ratings will be hugely affected. Having all the information in writing and well documented ensures you avoid trouble with the relevant authorities or lawsuits.

3. Get a Business Credit Card

Business credit cards operate just like personal (individual) credit cards. These cards help businesses spread out their expenses while allowing them some time when accounts receivable decrease. Depending on your selected credit card company, your business could get up to a month’s cushion. This means that you have a cash flow for a month up to the next payment cycle. 

When selecting business credit cards, you must understand that small business credit cards may attract higher limits than personal ones. The rates you get are entirely based on your credit as an individual, your income, and the revenue that your company has. The biggest benefit of these cards is that they are easy to qualify for. Paying your debt in good time builds your credit as a business. 

4. Consider Accounts Receivables Factoring

Many elements make cash flow change in accounts receivable. Whatever industry you are in, AR factoring will be the fastest source of cash. It is among the greatest accounts receivable process improvement ideas. In simpler terms, this means that you can sell your outstanding AR to a factor (a company). Your business will then get a payment up to a particular percentage of the total value of all your invoices. 

The factor will then collect the payments from the customers to avoid damaging relationships. While you may receive the other part of the money later (at a factoring fee), it saves you a lot and ensures a change in the account receivable cash flow process.

Depending on the factoring account you go to, you may be eligible for accounts receivable loans that allow your company to take short-term loans based on the value of the invoice. This acts as collateral which is more beneficial than selling the invoices to third parties. They collect funds on your behalf and pay themselves. 

5. Ask for Deposits from Customers

Most businesses have mastered this and require clients to pay a deposit or upfront fee for the products or services. Some accounting firms or companies will provide free consultation services and then charge an upfront charge while others require the fee even before the consultation for accounts receivable process improvement ideas. As a business, you must ensure that you are honest and transparent with the fees as this establishes a good relationship with your clients. Being trustworthy will win you more benefits and enhance cash flows more than sticking up unknown charges anywhere.

When setting up the deposit terms, you can begin by asking for 30% or even 50% of the full charge. If a client takes longer to pay or even disappears with the bill, your business experiences less impact as compared to fleeing with the full amount. Businesses must be very careful with this strategy as some clients may be afraid of giving away money before receiving the service. 

6. Renegotiate Terms with Your Suppliers

Businesses are made of different stakeholders such as the clients and suppliers. Most of them focus on the clients and forget about their suppliers. Remember that AR and AP (accounts payable) go hand in hand. Before mastering how to decrease accounts receivable, they must balance for a business to attain healthy finances. 

As a business, you might be shocked to know that your suppliers and vendors could be open to allowing you longer terms. If you have been a great customer, you have a better chance Having longer terms allows your customers more time to pay you thus helping you improve accounts receivable process.

If your suppliers accept your renegotiations, you must make the credit bureaus aware of the changes. This allows them to also mark the payment timeframe and adjust them accordingly. Otherwise, it would be quite unfortunate if you still made the payments in good time (by the new terms) only for them to be marked as late. 

7. Revoke Your Credit Terms

If worst comes to worst, the best way to handle your AR will be to revoke credit terms. While it is not something that every organization should do, it is powerful and can get your customers’ trust and attention. For it to be successful, you must analyze the current trends for payments as well as the current customer base.

The credit terms refer to the set time limits for the clients to make payments. Revoking them allows your business to buffer when things get tough. All this boosts your cash flow when the accounts receivable decrease.

Conclusion

Every business must take it upon itself to ensure that customers pay in good time. As seen above, the strategies you can apply to decrease accounts receivables and increase cash flows surround pushing your customers and coming up with the right plans. Start by incentivizing early payments and penalizing late payments. Proceed to get the right business credit cards and use AR factoring. Don’t forget to renegotiate with your suppliers as well as require deposits from your customers. With all this, you can guarantee your business healthy bank account balances! In addition, to increase productivity and efficiency try using an affordable accounting tool such as Basil Practice Management for Accountants for free.