AR is critical to the success of a business, yet it is one of the most difficult tasks to perform, as it directly impacts cash flow and the financial state of the company. Late payments from clients can disrupt the business as it can impede on your operational expense management. It can also affect any reinvestment opportunities into the business. To combat this issue, a well established credit policy alongside proper documentation, and effective management of receivables is essential. This article will highlight some of the most effective methods to streamline accounts receivables processes and protect the business against risks of payment delays.

Necessary Documentation for Any Kind of Business

Effective handling of receivables begins with sharp and thorough paperwork. Keeping each record meticulously ensures no detail is left unaccounted for and minimizes the chances of miscommunications.

Purchase orders (PO):

Providing services or products without an official purchase order is strictly prohibited. A purchase order, or PO, is official documentation that accompanies the sale, detailing the transaction. It also states the terms and conditions of such sales like scheduled deliveries and payment terms.

Proactive advice:

Every sale should be married with a purchase order. This creates a paper trail with the potential of reducing misuse payment challenges.

Formulating a Credit Policy Which Works

A set policy is essential in safeguarding a business against uncollectible accounts and extending credit to customers who have proven their reliability. The policies should state the terms and conditions of credit extension including time limits and methods of customer assessment.

Credit Operations and Their Problems:

Expenses:

There are costs associated with lending out credit, including carrying costs, salaries, office rentals, and the possibility of customer non-payment.

Non-Payment:

Lack of payment from clients can result in negative cashflow imbalances which can greatly disturb the operations of the business.

Tip:

Create a detailed credit policy that specifies the guidelines provided above. This policy will mitigate the chances of extended payment terms not being honored.

Maruti & Mahindra’s receivables accounts ratio is 37, which only shows a streak of 10 days. Compared to Maruti, Mahindra has a ratio of 14 which reflects a streak of 26 days. This shows a having a longer collection period.

Analyzable Suggestion:

• Check your cash receivables turnover ratio. Cash flow will be helped by speedy collections.
• Accounts Receivables More Effective Approaches 4.
• Implementing the following steps will help you illeviate your AR problem.

Customer Prepayment:

If you are dealing in services like Annual Maintenance Contracts, receive payment in antcipation before serving in order to eradicate any receivables.

Evaluate Credit Risks:

To gauge the client’s financial soundness and readiness, analyze their 5 C’s to determine risk for credit.

• Character – Their truth for trust
• Capacity – How well they can pay
• Collateral – Any security that they are able to offer
• Condition – The welfare of the industry and their current financial condition.

Evaluable Suggestion:

Always remember while putting contacts that credit check is of utmost importance. Try engaging a Non Banking Financial Corporation to vent operational risks with stringent credit assessments and guarantees.

 Effective Credit Control: Monitoring & Analysis

Rate of Accounts Receivable Turnover: The ratio shows the frequency at which a business pockets the periodic average amount of accounts receivable, It’s collection cycles compared against the amount of receivables. A high turnover ratio means receivables are collected in a matter of days.

Actionable tip:

Your collection period is too long, then you should lower your credit terms and AR turnover rate should be measured frequently.

Age Analysis:

This analysis allows one to group receivables accounts per the duration they are overdue with the aim of concentrating on the more overdue sub accounts sequentially.

Actionable tip:

• Overdue invoices should be well managed so they are not overdue without action to rectify them being taken through timely and proper analysis aging.
• ABC Analysis To classify customers for collection activities based on interdependence of value, stratification by value of the customer accounts is performed. The first level of segmentation should comprise active accounts of higher value that critically impact the cash flow of the company.

Actionable tip:

In order to control collection activities, classify customers according to the ABC principle and always give clients considered of the greatest importance a reminder regarding payments.

Understanding Legal Rights of Small Businesses

• Formulating proven mechanisms for recovering payments from customers by small and medium-sized enterprises (SMEs) businesses is challenging. Elimination of some obstacles on legal grounds can ensure payment is made on time.

SME Samadhaan This program makes it easier for SMEs to deal with late payments from big firms by providing a government sponsored program to resolve unpaid debts quickly. With this platform, debts can be collected more efficiently.

Actionable tip:

• Familiarize yourself with the legal resources available to SMEs like SME Samadhaan.
• This is an incremental action plan for increasing your efficiency regarding the management of accounts receivables.

Review your financial statements:

Keep track of receivables and the ratio of net sales to receivables frequently to catch issues in their early stages.

Make a comprehensive credit grant policy:

Develop a detailed credit policy and make sure that credit is only offered to customers who can be depended on.

Put in place Regular Aging Analysis:

Segment receivables according to time and follow up quickly with people that owe the money that is long overdue.

Service Customers Using Credit:

Wherever possible, bring customers in to service them without incurring any credit transactions.

Credit scoring:

Assess a customer’s business considering payment history, capacity, character, collateral and conditions before giving the credit.

Use your legal means:

SME Samadhaan can be used to recover defaulted payments and ensures that your business is safeguarded.

Conclusion

Managing incentive receivables is crucial for optimally preserving a firm’s cash flow and managing default risk. Protecting your business from late payments can be achieved by creating a strong credit policy, regularly assessing creditworthiness, and by employing established methods such as ABC and FSN analyses. Other means of protecting your business include monitoring the turnover ratio and resorting to legal means when the situation calls for it.

These strategies will ensure that the business not only cash flow but also mitigates financial exposure and raises profits.

Categories: Working Capital Management