One Word Matters: Cash
October 4, 2022Accounts Receivables Glossary – Know the Basics of AR
January 13, 2023
A strategic approach to Accounts Receivable to get paid easier.
ARM Accounts Receivable Management is a financial term that reflects both the strength and weakness of a business. On one hand, accounts receivable enables a long-term customer relationship based on credit. On the other hand, accounts receivable also creates a risky credit line on the company’s balance sheet. Customer creditworthiness, alignment between sales and finance teams, streamlined AR processes with minimal efforts, and accountable ownership are key elements that contribute to a smooth and goal-oriented accounts receivable approach.
In simple terms, accounts receivable management ensures that the credits from customers are fully paid within the agreed time, improves cash flow and provides businesses with sufficient working capital. However, the accounts receivable process is not as simple as it sounds, and many businesses face difficulties in achieving it making them as question - which strategies can your company use to improve cash flow?
Current Financial Environment:
Most businesses have established clear accounts receivable policies, but many of them are still struggling with the different aspects of ARM accounts receivables - timely invoicing, confirmed due dates, receivables timing, outstanding balances, discounts and agreed payment terms, and write-offs are all different pillars for an efficient AR planning.
Cash that is locked in receivables is a delayed asset, and as long as companies follow and maintain a planned approach, the risk is manageable. However, many companies try to bypass the rules in the process of increasing sales, retaining customers, or simply due to a lack of ownership, resulting in a chaotic situation to track the trapped cash.
In the process of increasing the number of sales deals, businesses often neglect the AR policies and by the time they realize it, their working capital is already affected. A smart approach is needed, where new sales and repeat deals make a positive impact on the balance sheet, by bringing cash into the business without compromising the customer relationship.
Which strategies can your company use to improve cash flow ?
While ARM accounts receivable Management is a lengthy process, understanding the customer’s capacity and credit worthiness is vital, to start with. When designing an AR strategy, it is important to communicate the plan clearly across the sales, marketing, and finance verticals of an organization, so that the teams work together toward the common business objective.
Every transaction with the customer has to be documented and must be accessible to all the stakeholders involved in the process. Understanding that AR is a repetitive process, it is important to follow a step-by-step approach and not skip any steps.
A typical Accounts Receivable collection process will start with the sales and delivery of goods, issuing the invoice, collecting payment (complete or partial payment), recording and tracking the balance payment by the accounts receivable team, and clearing the invoice once the payment is collected or writing it off as bad debt. Every business strives to avoid the bad debts on its books, and some of the following strategies will help the process
⦁ Clear segmentation of the customer base
⦁ Creating a proven accounts receivable plan
⦁ Effective follow-up and clear communication message
⦁ Professional dunning approach
⦁ Embedding B2B Payments in the accounts receivable process
A simple way of segmenting customers based on past payment experience will help the receivables team to establish the desired number of touchpoints. Every past communication response from the customer will be useful to categorize them and then a follow-up plan is devised for each group.
An accounts receivable plan aims to keep the receivables time frame as short as possible, as a delayed payment becomes riskier as the days pass. Therefore, it is important to reduce the credit extension days. An average invoice time can last up to 3 months, requiring a consistent and efficient follow-up depending on the customer base.
Embedding B2B Payments in the Accounts Receivable process is a smart way to facilitate faster and easier payments from the customers. By offering multiple payment options, such as credit cards, bank transfers, digital wallets, or cryptocurrencies, businesses can increase the convenience and security of the payment process. Moreover, by integrating B2B Payments with the accounts receivable software, businesses can automate the invoicing, payment reminders, payment confirmation, and reconciliation processes, saving time and reducing errors. B2B Payments can also enable businesses to offer incentives, such as discounts, rewards, or loyalty points, to encourage customers to pay on time or early.
One of the challenges of managing your accounts receivable is dealing with different types of customers and their payment behaviors. Large companies may have multiple approval levels that can cause payment delays, so you need to identify and contact the right person who can speed up the process and clear your invoice. However, in small and mid-sized companies, you may face the problem of competing with other creditors for your customers’ attention and cash. In this case, you may need to send frequent and friendly reminders to prioritize your invoices over others, and also offer incentives for early payments that can benefit both parties.
Another challenge of managing your accounts receivable is dunning, which is the process of contacting your customers to collect overdue payments. Dunning management can be a frustrating and delicate process if not done in the right way, so you need to understand and empathize with your customers first. You need to use the right tone, language, and medium to communicate with your customers, depending on their situation and preferences. When you do dunning management effectively, you can overcome many obstacles and make payment collection a super-efficient process.
Follow-up is another important word in the receivables context, and it is closely related to dunning management. Follow-up is the process of keeping in touch with your customers until they pay their invoices, or until you decide to write them off as bad debts. Follow-up is crucial to maintain a good customer relationship and to avoid losing track of your receivables. However, you cannot afford to be boring and repetitive in your follow-up messages. You need to use a personalized and professional approach in every follow-up, and also provide value to your customers, such as updates, insights, or tips.
Managing your accounts receivable can be a complex and time-consuming process, but it can also be a rewarding and satisfying one, if you use the right tools and strategies. One of the tools that can help you focus on one thing - getting paid faster and easier - is Kapittx, an Accounts Receivable automation software that uses facts to help you reduce your Days Sales Outstanding (DSO). Kapittx gives you a clear view of what’s working and what’s not, and why, in your Accounts Receivable process. It helps you establish a successful relationship between your customers’ accounts payable cycle, your invoice life cycle management, and your collective ownership. Kapittx also enables your collection teams and sales teams to collect payments faster and more efficiently than before, by embedding B2B Payments in the AR process.
B2B Payments are a smart way to facilitate faster and easier payments from your customers, by offering them multiple payment options, such as credit cards, bank transfers, digital wallets, or cryptocurrencies. These payment options can increase the convenience and security of the payment process for your customers, and also reduce the transaction costs and risks for you. Moreover, by integrating B2B Payments with the accounts receivable software, you can automate the invoicing, payment reminders, payment confirmation, and reconciliation processes, saving time and reducing errors. B2B Payments can also enable you to offer incentives, such as discounts, rewards, or loyalty points, to encourage your customers to pay on time or early.
If you are looking more details on which strategies can your company use to improve cash flow? If you want to improve your cash flow and reduce your DSO by more than 25%, you should try Kapittx, an AI Powered Accounts Receivable automation Software that embeds B2B Payments in the AR process. Experience how Kapittx can speed up your payments and make your ARM Accounts Receivable management a breeze.
FAQ
1. What is the best way to manage accounts receivable?
An effective AR strategy aligns with cash position and debtor profiles to maximize financial stability. Key components include:
- Clear Financial Goals: Regular tracking of cash flow helps meet short-term and long-term objectives.
- Credit Risk Management: Assess debtor reliability to minimize default risks.
- Timely Invoicing: Delays in generating invoices can disrupt cash flow—ensure prompt billing.
- Consistent Payment Reminders: Polite, persistent, and personalized reminders improve collection efficiency.
- Accurate Reconciliation: Helps prevent payment errors and detect discrepancies early.
Implementing these steps ensures a strong AR process, optimizing cash flow and financial health.
2. How is DSO calculated?
Days Sales Outstanding (DSO) is a critical financial metric that measures the average number of days a business takes to collect payments from customers after a sale. A high DSO indicates slow collections, which can strain cash flow and impact financial stability. Businesses must focus on reducing DSO to improve liquidity and operational efficiency.
Formula for DSO:
Accounts Receivable
DSO = ---------------------------- x Number of days
Total Credit Sales
Key Factors Affecting DSO:
- Customer Payment Behavior – Delays in customer payments lead to higher DSO.
- Invoice Accuracy & Timeliness – Errors or late invoicing can slow down collections.
- Credit Terms & Policies – Offering lenient credit terms can extend payment cycles.
- Collections & Follow-ups – Ineffective reminders and manual follow-ups result in overdue payments.
- Industry Standards & Seasonality – Some industries naturally have longer collection periods based on business cycles.
- Automation & Technology – AI-powered AR automation can streamline collections and reduce DSO.
How to Reduce DSO:
- Implement automated payment reminders to minimize delays.
- Offer discounts for early payments to encourage faster transactions.
- Strengthen credit risk assessment to ensure customers have the ability to pay on time.
- Optimize invoice processing to eliminate disputes and errors.
- Use multi-channel payment options for easier and faster transactions.
Reducing DSO helps businesses improve cash flow, maintain financial stability, and minimize risks associated with overdue receivables.
3. Which strategy is a way to improve cash flow?
A strong cash flow begins with proactive receivables management across the entire order-to-cash cycle. Businesses must optimize every step from customer engagement to payment collection to ensure timely inflows. Key strategies include:
- Clear & Accurate Quotations – Set the right expectations from the start with transparent pricing and well-defined terms.
- Streamlined Order Processing – Reduce delays with efficient contract administration and swift fulfillment.
- Effective Credit Management – Implement credit limits, assess customer risk, and ensure timely follow-ups.
- Precise Invoicing & Billing – Avoid disputes by ensuring invoices are accurate, timely, and easy to process.
- Automated Payment Reminders – Leverage AI-driven reminders to minimize overdue payments and improve collections.
- Early Payment Incentives – Encourage faster payments with discounts or benefits for early settlements.
- Multi-Channel Payment Options – Offer diverse payment methods to make transactions smoother and more accessible.
By optimizing these areas, businesses can accelerate collections, reduce outstanding balances, and maintain financial stability.
4. Why is it difficult to improve cash flow?
Enhancing cash flow requires strong operational efficiency, but businesses often struggle due to several key challenges. Poor execution at any stage can disrupt inflows, leading to financial strain. Key obstacles include:
- Lack of Strategic Planning – Inconsistent financial forecasting and cash flow projections can lead to liquidity issues.
- Inefficient Receivable Management – Delayed invoicing, unclear ownership of receivables, and weak follow-ups cause collection bottlenecks.
- Inadequate Documentation – Missing or incorrect contracts, invoices, and payment records create disputes and slow down collections.
- Poor Customer Credit Assessment – Extending credit without proper evaluation increases the risk of bad debts.
- Limited Payment Tracking & Reconciliation – Without real-time tracking, businesses struggle to identify overdue payments.
- High Dependency on Manual Processes – Lack of automation in collections leads to inefficiencies and delays.
- Customer Payment Delays – Clients may face their own cash flow issues, affecting timely payments.
- Rigid Payment Terms – Businesses that don’t offer flexible payment options may struggle with customer delays.
- Supply Chain Disruptions – Delayed supplier payments or inventory issues can indirectly impact cash flow.
- Lack of Proactive Communication – Businesses that fail to engage customers effectively on payment timelines often face disputes and delays.
By addressing these challenges and optimizing operations, businesses can strengthen their cash flow and maintain financial stability.
5. How do you manage better cash flow?
Effective cash flow management starts with planning and execution. Businesses must anticipate their cash needs, optimize collections, and minimize unnecessary expenditures to ensure financial stability. Key strategies include:
- Cash Flow Forecasting – Predict future cash needs based on business growth and expenses to avoid shortfalls.
- Advance Payments – Encourage customers to pay in advance or offer incentives for early payments.
- Accurate Bookkeeping – Maintain clean financial records for precise receivables tracking and reconciliation.
- Periodic Receivables Reconciliation – Regularly review accounts with customers to prevent payment disputes.
- Optimized Payment Terms – Negotiate favorable payment terms with suppliers to align with cash flow cycles.
- Expense Control – Identify and eliminate unnecessary or discretionary expenses to improve liquidity.
- Automated Collections & Follow-ups – Leverage AI-powered tools to streamline receivables management and reduce payment delays.
- Diversified Revenue Streams – Explore new revenue sources to reduce dependency on a single income channel.
- Emergency Cash Reserves – Maintain a financial cushion for unexpected expenses or market fluctuations.
- Strategic Accounts Receivable Management – Implement a well-defined execution plan for timely collections and efficient credit control.
By focusing on these areas, businesses can ensure a steady cash flow, minimize financial risks, and maintain operational efficiency
