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One of the most common pitfalls for aspiring entrepreneurs and business owners is running out of money. While many passionate individuals who have a great idea take the risk to establish a business so that they monetize it, they end up failing when liquidity issues strike. Most of them have a clear vision of their daily expenses, but they often struggle to accurately track incoming revenue. This lack of financial clarity can quickly lead to cash flow problems and, ultimately, business failure.
Additionally, inexperience in managing a business or a reluctance to delegate tasks can further exacerbate these issues. By understanding these common challenges and taking proactive steps to address them, entrepreneurs can significantly increase their chances of success. It is understandable that few business ideas are reflective of their owner’s passion and the person cannot afford to hire professionals in-house or oversee the managed accounts receivable function themselves. However, there are ways to overcome these challenges through managed services that take care of all the automated needs of an accounts receivable or an AR function.
Due respect has to be given to cash flow management because it is the lifeblood of a business. For the uninitiated, one can imagine your business as a human body. Just like a body needs blood to function, your business needs cash to keep running smoothly. This flow of money in and out of your business is called cash flow. Your customers will determine the inflow and your vendors will be the outflow points. You need both to pay and receive money due from and to them in time, so that the operations of your business are not impacted adversely.
Why Is Cash Flow Important?
Unfortunately, we don’t live in the era of the barter system. Only valid currency exchange in lieu of goods sold or services rendered are regarded as legitimate tender. This is the reason positive cash flow from operations is a determining factor for most stakeholders. In simple terms, it’s like having enough money in your pocket to buy your favorite snack or catch a movie. Your business needs cash to pay its bills, salaries, and other expenses. Without enough money, your business could face serious problems.
Accounts Receivable: Your Money, Waiting to Come In
Accounts receivable (AR) is like a promise to pay. When you sell a product or service on credit, you’re essentially lending money to your customer. This money that your customers owe you is your accounts receivable.
Why Is AR Important?
As iterated earlier, we live in a world where a formal exchange of goods or services is bought with money. Though, in some parts, people are using different means to buy stuff, the currency still remains a popular medium of exchange for a lot of things that we buy or sell. If we are leasing extra space, we earn rent that is settled at the end of the month via a rent credit from the tenant into our bank account. Similarly, we work at a place, we get our salary credited into our account.
In business terms, a sale can occur when a buyer purchases goods with a promise to pay the remainder by a certain time. The minute a customer receives goods and still owes money to the business, they become its debtors. You can think of it this way: if you lend money to a friend, you’d want them to pay you back on time, right? Similarly, your business needs to collect the money owed to it by customers promptly. Efficiently managing your AR helps ensure a steady flow of cash into your business. While automation is a powerful tool to streamline accounts receivable, it’s not a silver bullet. Here are some additional strategies to enhance your AR process:
Clear And Timely Invoicing
Ensure your invoices are clear, concise, and easy to understand. Include all relevant information like itemized details, payment terms, and contact information. Send invoices promptly after the service is rendered or goods are delivered. This reduces the risk of late payments and disputes.
Efficient Payment Options
Offer various payment options like online portals, credit card payments, and checks to cater to different customer preferences. Simplify the payment process for your customers by providing user-friendly online portals and multi-channel payment gateways
Strong Customer Relationships
Build strong relationships with your customers by addressing their concerns promptly and professionally to personalize your connection. Proactively keep your customers informed about their account status, upcoming payments, and any potential issues.
Robust Collection Policies
Establish clear payment terms and communicate them effectively to your customers before every sale deal is closed. Implement a systematic follow-up process for overdue payments, starting with gentle reminders and escalating to more assertive measures if necessary. Most times, customers miss their payments as they have forgotten to diarize their calendars with the payment schedule.
Regular Review And Optimization
Monitor key metrics like days sales outstanding (DSO) and average collection period to identify areas for improvement and help in performance tracking. Regularly review your AR processes and make necessary adjustments to optimize efficiency and reduce costs. A problem that is identified early on, minimizes risks and losses to a remarkable extent.
Conclusion:
Partnering with a managed services platform that offers automated solutions for accounts receivable and payable will be a blessing for small and mid size business owners as there is no requirement to hire additional staff to take care of core tasks involved like raising invoices after cross checking all the details and sending reminder alerts to clients to pay up within time.
Many people often misunderstand the importance of cash flow, equating it simply with liquidity. While cash flows are crucial, it’s important to note that cash flows from operational activities hold more significance than those from investing or financing activities. The reasoning behind this is straightforward: cash flow refers to the movement of cash in and out of a business. For instance, if a business takes on short-term debt to cover daily expenses, this is recorded as positive cash flow. However, this does not reflect a genuinely positive situation, as the liability will ultimately need to be repaid. Implementing automation can help business owners navigate and overcome these challenges efficiently.
