Cash flow is critical to the success of your business; but when that cash flow is tied up in accounts receivable, you may not be able to keep up with business expenses to keep the business viable. With good people and good accounts receivables (AR) management, you should be able to stay on track. What if something intervenes — like a crisis that disrupts normal business practices. Here’s a few best practices that may help you weather the COVID-19 storm, and other crises you may encounter in the future.

Proactive AR management

Proactive AR management is a strategy that helps you maintain positive cash flow and strong business relationships. Sending a collection letter, for example, is a reactive approach that will likely cause resentment with customers that could result in a damaged or even lost relationship. Shifting from a reactive to proactive management style can significantly improve your company’s cash flow and client relationships.

During uncertain times, it’s important to not only be diligent about extending credit, but to be quick in recovering the debt, which might mean stricter credit terms. You may need to shorten your collection times to keep cash flowing into your business. You also may need to adjust your inventory levels.

Although it’s difficult to predict demand during a crisis, by monitoring trends, you can mitigate any surprises. Analyze customer demands and adjust purchases, as necessary.  Create a cash flow forecast that shows your major cash inflows and outflows. This insight will enable you to project dips in cash flow so you can remain agile and ensure success for your business.

Billing policies and practices

Becoming more proactive in AR management requires improving your billing practices and closely monitoring your AR status. Submitting all contracts in writing and using detailed invoices are just a couple of ways to improve your billing. Monitoring your AR will help you identify slow-paying accounts, for example. The earlier you begin collection efforts with these slow-paying accounts, the greater the chances of getting paid and maintaining your cash flow ― which is the goal of proactive AR management. Here are a few tips to improve your billing practices and, ultimately, your cash flow.

  • Review accounts payable. Talk to your suppliers about options for managing your payments and shipments.
  • Get set up to accept credit card payments. There are many great choices that integrate with billing systems and have streamlined fees. Electronic payments also make it easier for customers to satisfy their debt.
  • Perform a thorough credit risk analysis. This analysis will provide insight into a potential customer’s credit worthiness.
  • Have a written credit policythat outlines credit terms, including a set number of days before the account is overdue. Keep in mind that shorter is often better (i.e., 45 days instead of 60).
  • Create an AR aging report. This report should track the payment status of all customers to help you identify slow-paying accounts before they become significantly overdue.
  • Review your AR processes. Identify bottlenecks in your debt collection system that require tweaking.
  • Establish incentives for payment. Offer an early payment discount and/or set up late payment fees.
  • Digitize invoicing. Use electronic invoicing instead of paper to expedite the invoicing and payment process.
  • Set up automatic reminders. Send automatic reminders the first day that accounts become overdue, rather than waiting 10 or 15 days.

In times of crisis, like we are experiencing today with the COVID-19 pandemic, it can be difficult to know what the future holds and how to plan for it. Implementing a cash flow management strategy is critical for the success of your business — but it takes teamwork. Be clear and transparent with your AR team so they understand the plan, promote a shared mission, and instill a sense of pride in individual accomplishments that contribute to the future success of the company.

Need help managing your commercial credit risk? MSCCM financial experts can assist you. Contact us today.