How To Use Your Receivables To Manage Cash Flow?

A company faced with continual cash flow issues misses out on several growth opportunities. Unfortunately, mitigating a shortage of working capital is often an uphill climb for many businesses in India. 

As a result, they may raise funds by borrowing, selling assets, or raising equity. However, some enterprises, especially MSMEs, find it rather difficult to raise funds through these sources. 

So, how can you access cash flow in such a situation? 

We suggest you think outside the box and leverage your receivables. Allow us to elucidate on ways to improve cash flow from account receivables.

8 Ways To Manage Cash Flow With Receivables

• Know Your Customer

Do not rush to sell on credit. It is vital to assess the ability of your clientele to make timely repayments. Therefore, assess the creditworthiness of your customers, especially if their order is large. 

This goes for all your customers – both new and existing ones. In the case of new customers, you can scan through their financial statements and evaluate their credit reference. As for repeat customers, you can easily review their payment history.

• Maintain Clear And Concise Invoices

When using account receivables to improve cash flow, it is imperative to set up an accounting system that formats and sends prompt invoices. Here, ensure that all your invoices are comprehensive and itemised. An invoice must include the payee’s address, invoice number, invoice date and address, due date and amount, discounts (if any), billed products, as well as terms and conditions of the payment.

• Keep An Eye Out On The Receivables

Accessing cash flow from account receivables calls for acute monitoring of invoices. For this, you should review your business’s account receivables ageing report. It is a record of overdue invoices based on the length of time they have been outstanding. An AR ageing report breaks down accounts by the number of days passed since the issue of invoices, such as:

• More than 90 days
• 61-90 days
• 31-60 days
• 0-30 days

This report also lists the due amount. As a result, you can easily address any potential problem before a bill becomes past due. Also, you can take the necessary course of action when an invoice remains unpaid on its due date. 

• Enable Easy Payments

Extend an array of payment options to your clientele. The following are some options that you can deploy:

• Electronic transfer of funds: Furnish your bank account details on your invoices.
• UPI payments: Include the details of your mobile banking account or e-wallet on invoices.
• Cheque or cash payments

A variety of  options ensure that payments are not delayed due to the mode of transaction. Additionally, your customers can enjoy the leeway to make payments via a channel that suits them best. Less hassle for customers increases the possibility that dues will be cleared on time, thereby optimising your cash flow management.

• Remind The Customer

Customers can get caught up in their business and overlook a due payment. So, it is helpful if you remind your customers by way of an email a few days prior to the due date. However, doing this manually can be cumbersome. In that case, you can also employ technology to automate this customer service feature and set up alerts that notify your customers of due payments. 

• Incentivise Continuous On-Time Payments

You can access cash flow from account receivables by offering incentives to your customers that complete prompt payments for consecutive months. For instance, if a particular client pays on time for 4 months in a row, a business can offer them a small discount on the next payments or a gift. Such incentives will encourage customers to be at the top of their payments, alongside improving your business cash flow. 

• Plan For Past Dues

While you focus on optimising receivables, it is important to look back at past overdue invoices. You can offer instalment plans, a promise to pay, or an entirely new contract. After all, receiving a lesser payment or full payment at a later date is better than no payment at all.

• Go For Invoice Discounting

Businesses in India are increasingly turning to invoice discounting for cash flow improvement. It is a financing facility wherein a company can avail funds against their account receivables. As a result, invoice discounting allows businesses to access the cash that will be otherwise tied up in unpaid invoices. 

Moreover, you remain in control of your sales ledger, sending out reminders to customers and collecting payments. So, your customers are not aware that your business has opted for cash flow finance, which keeps its credibility unstained.

Adequate inflow and outflow of cash are essential to sustain a business. Therefore, businesses can leverage their receivables as a tool to mitigate cash flow shortage. They can also avail invoice discounting, which allows them to access cash flow from account receivables.