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Blog » Cash Flow with Effective Accounts Receivable Management

Cash Flow with Effective Accounts Receivable Management

Last updated: 04 Jul, 2024 By | 6 Minutes Read

accounts receivable management

Entrepreneurs often consider profit and loss accounts to increase profit margins. Hence, they prioritize profit or accounts receivable and hold it as the primary measure of business success. This can take a business away from realizing its goals because it is cash flow that is of utmost importance. As the adage goes,

“Entrepreneurs believe that profit is what matters most in a new enterprise. But profit is secondary. Cash flow matters most.” 

– Peter Drucker, the management guru

While profit represents the financial gain of the business over the period, cash flow reflects the inflows and outflows of actual cash. A healthy cash flow ensures a business’ good health and provides the foundation for long-term profitability and the success of an enterprise.

Effective cash flow management is vital for the success and sustainability of a business. 

It allows organizations to maintain their operations, make timely payments, plan capital expenditures, and make informed business decisions for growth and expansion. It provides businesses with the necessary liquidity, stability, and flexibility to navigate challenges, seize opportunities, and thrive in a competitive marketplace.

How to achieve a good cash flow situation?

The answer lies in your accounting practices – with effective accounts receivable management.

A strong accounts receivable function enables a firm to take control of its revenues, chase its receivables, and ensure minimal bad debts. It will take care of:

  • Accurate and timely invoicing for products or services provided
  • Clearly communicate payment terms to customers thereby encouraging timely payments
  • Enable timely collections by establishing efficient collection procedures through proactive follow-ups on overdue accounts and reminders
  • Creditworthiness evaluation of customers before extending credit in order to minimize the risk of payment defaults and bad debts
  • Defining of payment incentives and penalties to safeguard against payment delays
  • Drawing up of effective collection strategies that will not only protect cash flow, but also customer relationships
  • Establishing effective accounts receivable aging reports to identify high-risk accounts and prioritize collection efforts accordingly
  • Accurate cash flow forecasting by tracking outstanding invoices, expected payment dates, and historical payment patterns

What goes into the setting up of an effective accounts receivable process?

The accounts receivable process involves managing and tracking the payments owed to a business by its customers. It encompasses several key steps that start with the occurrence of sales upon defining payment terms and due dates, then moves to invoicing taking into consideration the products sold or services provided, quantities, prices, and applicable taxes or discounts.

Upon receipt of payments, the process moves to payment recording against the exact sale. For instances of delayed payments, follow-up and collections processes are triggered.

Reconciliations are made to get a view of the outstanding payments, and aging reports are prepared for further follow-ups.

For payment defaults, bad debts are recorded, and vendor accounts duly updated with subsequent course of action that may involve legal notices.

Accounts receivable management is a complicated process, and if not defined well, can result in significant business loss. To overcome accounts receivable challenges, it is imperative to use good accounting software and ensure accurate accounting and reporting, timely cash flow, compliance, and overall business health.

Most organizations also rely on good outsourcing companies for the management of their accounts receivable processes. Cogneesol is a leading business process management organization, which specializes in end-to-end finance and accounting services that include comprehensive accounts receivable services to businesses across industries.

Our domain expertise, global experience, technology-driven approach, and focus on client satisfaction make us a reliable partner for businesses seeking to enhance their accounts receivable management and improve cash flow.

With over many years of experience, we have consistently delivered value to our client organizations. We have significantly impacted their margins by improving their efficiency, collections process, and bad debt management.

    Success Story

    For one of our clients, a leading medical staffing agency based in California that holds a prominent position nationwide as a provider of travel nurse and allied healthcare staffing services to renowned healthcare facilities, we streamlined their accounts receivable process on NetSuite ERP solution. We currently manage monthly transactions of $80 million to $100 million and ensure timely staff payments. The significant business outcomes delivered include:

    • Reduced accounts receivable outstanding by 99%
    • Increased cost efficiency by 50%

    Read in detail by clicking — Case Study – Streamline Accounts Receivable for Staffing Agency

    Streamline your accounts receivable process and build proactive collections by partnering with Cogneesol. We will implement systematic follow-up procedures, send timely reminders, and employ best practices in your accounts receivables management to ensure timely payments from customers, thereby accelerating your cash inflows.

    Contact us at +1833-313-3143 / [email protected] for an overview of our domain and technology offerings that have the potential to transform your accounts receivable functions and bring about healthy working capital management leading to increased profitability and business agility.