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5 Ways to Improve Working Capital by Optimizing Accounts Receivables

Improve working capital with these adjustments in AR.

Effective management of accounts receivable (AR) is crucial for maintaining healthy working capital and improving cash flow. Here are five strategies to enhance your AR processes and, in turn, bolster your working capital.

1. Implement Proactive Accounts Receivable Management Strategies

Proactive AR management involves taking a hands-on approach to monitor and manage the credit extended to customers. This includes:

  • Setting Clear Credit Policies and Limits: Establish guidelines for extending credit to customers, ensuring they align with your risk tolerance. This includes minimum requirements to establishing Net terms such as no negative public records, minimum available cash, and two years of ownership.
  • Regular Credit Reviews: Frequently assess the creditworthiness of your customers to mitigate potential risks. Best practices standard is to renew lines every six months; more often if the risk of default is high.
  • Auto Holds: When customers don’t pay within terms, minimizes losses with automatic holds at a set period. For example, if your terms are Net 30, you may set the auto hold feature at 60 days. If the customer doesn’t pay within 60 days, all new orders go on hold. To align with your risk tolerance, the higher the risk, the faster the holds.

2. Automate AR Processes

Automation can significantly streamline AR management by reducing manual tasks and minimizing errors. Automated systems can handle:

  • Invoicing: Automatically generate and send invoices as soon as transactions are completed.
  • Payment Reminders: Schedule reminders for customers to pay before or when invoices are due.
  • Collection follow-up: Automatically prompt follow-ups on past dues to escalate collection efforts. Tools like TCD’s SMART platform provide advanced automation capabilities, enabling detailed invoice-level tracking and ensuring timely payments.

3. Enhance Analytics and Reporting

Robust analytics and reporting are essential for gaining insights into your AR performance. Key steps include:

  • Track Key Metrics: Monitor Days Sales Outstanding (DSO), average contacts made per collector and aging reports to identify trends and areas for improvement.
  • Real-time Reporting: Utilize real-time data to make informed decisions and quickly address any issues impacting cash flow. Detailed reporting on key customers, high risks, and concerning payment slowdowns helps optimize cash flow and reduce outstanding receivables by providing a clear view of your AR health and causes for payment delays.

4. Effectively Manage Deductions and Disputes

Deductions and disputes are common in AR management and can significantly impact cash flow if not handled promptly. Effective management involves:

  • Clear Processes: Establish a clear process for managing each type of deduction and dispute to resolve quickly.
  • Customer Communication: Maintain open communication with customers, Sales, and Customer Service to address issues as they arise.
  • Documentation: Keep detailed records of all interactions and resolutions. Using technology, like the SMART platform, to track and resolve dispute issues efficiently streamlines this process and prevents future cash flow disruptions.

5. Conduct Regular Risk Assessments

Regular risk assessments are crucial for identifying potential threats to your AR. This includes:

  • Customer Risk Evaluations: Regularly evaluate the credit risk of your customer base. As risk increases, so should your profit margins to offset the risk.
    Economic Monitoring: Stay informed about economic conditions and how they might affect your customers’ ability to pay.
  • Industry Trends: Keep abreast of trends that could impact your sector and adjust your strategies accordingly. Consulting services, such as those offered by TCD, can provide expert insights and strategies for effective risk management, helping to protect your cash flow and maintain a healthy working capital position.

Conclusion

Optimizing your accounts receivable is key to improving working capital and ensuring the financial health of your business. By implementing proactive AR management, automating processes, enhancing analytics, effectively managing deductions and disputes, and conducting regular risk assessments, you can significantly improve your cash flow and strengthen your overall financial position.

TCD’s comprehensive suite of AR solutions, including the advanced SMART platform, is designed to help businesses achieve these goals and drive sustainable growth. By leveraging these strategies, you can optimize your working capital, improve cash flow, and set your business up for long-term success.

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