Cash Flow Chronicles | Managing AR & AP

Credit Terms: Define clear credit terms, including payment deadlines and interest on overdue accounts. Ensure these terms are communicated clearly to customers. Do not be afraid to issue interest charges. This is often something businesses overlook almost always that can really help your position.

Credit Checks: Conduct thorough credit checks before extending credit to new customers. This minimizes the risk of default. Pull credit reports, analyze financials, contact references, etc.

Timely Invoicing: Send invoices promptly after delivering goods or services. Delayed invoicing can lead to delayed payments. Click “timely invoicing” above to view a short YT video on this!

Accurate Invoices: Ensure invoices are accurate and include all necessary details, such as purchase order numbers, item descriptions, and payment terms. Errors can cause payment delays and are many times avoidable.

Automated Reminders: Implement an automated system for sending payment reminders before the due date. This can significantly reduce late payments. You should also follow up prior to any invoices becoming past due.

Personalized Follow-Ups: For overdue accounts, personalized follow-ups through phone calls or emails can be more effective than generic reminders. Over my 15 years in the accounting world, I’ve found email to be more successful on these. Phone obviously works, but many times the AP on the other end needs time to review/analyze. So email, then follow up with the call in my opinion.

Discounts: Offer discounts for early payments to encourage customers to pay sooner. For example, a 2% discount for payments made within ten days with 30 days max. Conduct analysis to understand your breakeven point in offering discounts.

Flexible Payment Options: Provide multiple payment options, including electronic funds transfer (EFT), credit cards, and digital wallets, to make it easier for customers to pay promptly. Avoid being paid by check!

AR Aging Reports: Regularly review AR aging reports to identify overdue accounts and prioritize collection efforts. You or your team handling AR needs to be engaged on this daily or at a minimum 2-3 times weekly. Proactive approach.

Targeted Collection Strategies: Develop targeted strategies for different aging categories, such as sending gentle reminders for recently overdue accounts and more assertive collection efforts for significantly overdue ones. You can categorize into A, B, and C customers.

Build Relationships: Foster strong relationships with customers to improve communication and payment reliability. How often do you talk to your customers outside of just confirming invoices will be paid? Send a thank you card to them.

Resolve Disputes Promptly: Address any disputes or issues promptly to prevent payment delays. Disputes need resolved PRIOR to an invoice becoming past due. Highly suggest language in your T/C’s (terms and conditions) and on the invoice that state something like “you have 7 days from invoice date to review this invoice or it’s accepted as is.”

AR Software: Invest in AR management software to automate invoicing, payment reminders, and reporting. This reduces manual errors and saves time. If your ERP can automate any function for your team, DO IT.

Analytics and Reporting: Use analytics to gain insights into payment patterns and identify potential issues early. Your management should be pulling together reporting each month on balances, past due, DSO, ADP, Credit Limits, Terms, and more.

Invoice Factoring: Consider invoice factoring as a financing option to improve cash flow. This involves selling AR to a third party at a discount in exchange for immediate cash. This is for those in a tight spot in my opinion. If you’re factoring now and want to avoid thousands in fees/charges, email me today and I’ll help you avoid those fees! [email protected]

Credit Insurance: Purchase credit insurance to protect against non-payment risks and ensure a steady cash flow. Just had a call with a gentleman who specializes in this so if you want an introduction I can make that happen tomorrow.

Payment Terms: Negotiate favorable payment terms with suppliers, such as extended payment periods or early payment discounts. You don’t know if you don’t ask….

Approval Workflows: Implement clear approval workflows for processing invoices to avoid delays and ensure accuracy. Your team should know what approvals are needed for any invoice flowing through your business.

Centralized Invoicing: Centralize invoice receipt and processing to streamline the AP workflow. ERP can’t handle this? No problem, you can build this in something like Google or MS Teams.

Three-Way Matching: Use three-way matching to verify that the purchase order, receiving report, and supplier invoice match before making a payment. This reduces the risk of errors and overpayments. Click above to watch a short clip on this.

Payment Scheduling: Schedule payments based on cash flow forecasts to ensure that you have sufficient funds to cover obligations without straining liquidity. This should be forecasted on your daily cash flow or your 13 week forecast. Don’t have one? Email me to get this implemented today. Huge changes will be seen in how you manage cash for your business.

Prioritize Payments: Prioritize payments based on due dates and any available discounts. Pay early to take advantage of discounts, and schedule other payments to maximize cash flow. Pay early to take advantage if possible, but also don’t stretch your cash thin by doing this. You have to plan.

Negotiate Terms: Negotiate favorable payment terms and discounts with suppliers. Building strong relationships can lead to better terms and conditions. Again, start high and work from there.

Communication: Maintain open communication with suppliers to manage expectations and address any issues promptly. It should not take your team long at all (maybe a day….) to provide suppliers back with information. If you are taking 3-5 business days to respond, you have to change that.

AP Automation: Invest in AP automation software to streamline the invoice processing and payment workflow. This reduces manual errors and improves efficiency.

Electronic Payments: Use electronic payment methods, such as EFT or automated clearing house (ACH) transfers, to ensure timely payments and reduce processing costs. Check with your bank as this may already be included in your business account(s).

Vendor Analysis: Regularly analyze vendor performance and costs to identify opportunities for savings. You need to evaluate where you can save or have discussions on pricing.

Consolidate Suppliers: Consolidate suppliers to leverage bulk purchasing and negotiate better terms. You have options, make sure you’re picking the right ones.

AP Aging Reports: Review AP aging reports regularly to track outstanding obligations and prioritize payments. Reconcile monthly, but your AP Management should be seeing where things are at weekly.

Early Warning Systems: Implement early warning systems to identify potential cash flow issues before they become critical. This should be built into your daily cash or 13 week.

Just-In-Time Payments: Time payments to coincide with due dates to maintain cash flow while meeting obligations. This also shows your suppliers you’re willing to pay quickly vs pushing them.

Staggered Payments: Stagger payments throughout the month to avoid large cash outflows at once. 1-2 pay cycles a week? Bi-weekly? You can choose, but spread things out.

Supplier Financing: Explore supplier financing options, such as supply chain financing, to extend payment terms without affecting supplier relationships.

Credit Lines: Maintain credit lines with financial institutions to cover short-term cash flow gaps.