How to Deal with Longer Receivables Cycle?

Financial Support
20 Jul 2022

No business can afford to let their existing capital go to waste, given the expense of fresh capital. Some companies, however, are unaware of the amount of cash that is hidden on their own balance sheets. By maximizing their working capital, they may free up that cash and achieve more than just increased operational effectiveness. 

It provides businesses with the extra liquidity. SMEs need to fund expansion, cut debt loads, lower expenses, increase shareholder returns, and even beat rivals. 

The easiest method of invoice financing is undoubtedly invoice discounting. With invoice discounting, like with all other forms of invoice financing, you sell unpaid invoices to a lender who then gives you a cash advance based on a portion of the invoice’s value.

With bill discounting, traders can get short-term financing by offering to buy unpaid invoices with future due dates to financial institutions for a commission. Without affecting their balance sheets, this enables the traders to optimize their cash flows and business payment cycles. The tenors that lenders typically offer while providing bill discounting services range up to 180 days.

Why Does Your Turnover in Accounts Receivable Matter?

Your company will have more cash on hand to cover expenses and service obligations if your accounts receivable turnover ratio is greater. On the other side, a low turnover may be a sign that your company has either of these issues: Poor credit management procedures, a careless attitude to customer collections, or a clientele with a history of financial instability Protecting your company’s financial stability requires a close examination of your credit policies and accounts receivable procedures. 

Tips To Increase Your Accounts Receivable Turnover 

1. Issue timely, accurate invoices.

Your consumers will find it easiest to pay a precise, thorough bill. However, it’s crucial that you charge frequently and on time. Late-invoicing businesses run the danger of becoming known for taking late payments.

Don’t make the error of delaying billing clients until there are considerable amounts owing. It’s more likely that customers will have forgotten about services or goods they were billed for more than a month ago. Customers find it less intimidating to pay smaller, more frequent invoices rather than a single, hefty quarterly charge.

2. Include the terms of payment.

By clearly stating the payment terms on your invoices, you can improve the performance of your accounts receivable. Don’t be hesitant to incorporate late payment fees when asking for payment within 30 days.

Fees for late payments often represent a percentage of your initial invoice total. It would be a good idea to also set credit limits or provide payment plans if you sell goods or services at a larger price value.

3. Offer reductions for prompt payment

Promoting early payment may have a cost, but the money received, and the time saved on collecting it, may outweigh it.

You can set up your payment terms to be net 30 days, which gives your customer a 1 percent discount on the bill, if they pay by day 10 after the invoice date. Customers that are looking for ways to save money may be more inclined to take full advantage of this offer, which would quickly enhance your cash flow.

4. Make it simple to pay invoices

Giving consumers a variety of payment options makes it simpler for them to use the accounts payable method that their accounting department wants. They will also be much more inclined to pay your invoices on schedule.

However, the days of solely accepting cheques or wire transfers as forms of payment are long gone. Nowadays, the majority of businesses also accept credit card payments and EFTs (electronic funds transfers).

5. Make your billing structure simpler

By switching to fixed-fee billing, many service organizations have reduced their issues related to accounts receivable. You effectively supply the same monthly services at a predetermined price when you agree with your client. And that can significantly lessen the anxiety that frequently arises when a client receives a greater invoice than expected.

Fixed fee billing solutions make it simpler for you to take money directly from your customers’ accounts each month using pre-authorized debt. Fixed-fee billing so strikes a good mix between giving your consumers invoicing transparency and guaranteeing you get regular payments on schedule.

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