How Accounts Receivable Affects Business Cash Flow

business cash flow on tablet

Business cash flow is vital to the health and longevity of your company. Even if you’ve got a million-dollar idea, it won’t go anywhere without money to sustain it.

You also can’t calculate your cash flow with a single number. Instead, you must add together your financing, operational cash flow and investment money to get a clearer picture of how much you have on hand to run your business.

One main figure that falls under the umbrella of operational cash flow is the money from your accounts receivable. A challenge is that 80% of small to medium-sized enterprises (SMEs) often receive late payments. Any amounts tied up in unpaid invoices aren’t counted as physical cash flow until you have the money in hand.

With that information in mind, it should be apparent just how big a role accounts receivable plays in your business cash flow. Here’s why you need to stay on top of these numbers in relation to your cash flow — a task in which we specialize here at PayPie.

1. Accounts receivable isn’t set in stone — you need to manage it as closely as you monitor your business cash flow

Tracking your accounts receivable is always a good idea. Otherwise, you might look at your available cash and think the number is unexpectedly low — if you know you have a big payment on the horizon, though, you can rest assured the money’s on its way.

Until you receive these payments, you cannot consider them part of your business cash flow. Therefore, it’s vital to chase your accounts receivable and ensure the money comes in — otherwise, you might find yourself entirely beneath the benchmark of the amount of cash flow you need.

2. Accounts receivable might clash with accounts payable — if they’re out of synch it affects business cash flow

We’ve already touched on what accounts receivable are. Your accounts payable are all the bills you’re obligated to pay. Just as you give your customers a window in which to send their money, you, too, are on the hook for your rent, utilities, office supplies, etc.

There can be a clash between these two figures if you’re not receiving your accounts receivable in plenty of time to take care of your accounts payable. If your accounts receivable turnover ratio is too high, you might find your cash flow completely strapped when it comes time to pay off your pending accounts payable. A slimmer repayment window for your accounts receivable could be the solution to your problem — in fact, it could save your business.

AR Knowledge: Understanding Your AR Turnover Ratio

3. Outstanding accounts receivable can slow business cash flow and growth

We can’t reiterate enough just how much your burgeoning business depends on cash flow. Without it, you won’t be able to grow your company along with trends, demands, technological updates, etc.

Imagine, for instance, an updated software that can make your job more efficient and straightforward — boosting production and lowering the cost to make your goods. Without enough cash on hand, you can’t pay to upgrade your computers and improve your workflow. With tighter reins on your accounts receivable, though, you might have this money available to keep things moving — and growing.

Another tool to be aware of is invoice factoring. It lets you sell un unpaid invoice to a factor (lender), who’ll immediately give you a percentage of the invoice to help boost your business cash flow — and purchase that much-needed software update. Once the factor is paid by your customer, you’ll get the remaining balance minus interest and fees. (Another perk, unlike traditional term-loans or lines of credit, the use of invoice factoring isn’t reported to the credit bureaus.)

cash flow forecast

Learn More: Invoice Factoring vs Invoice Financing

4. If accounts receivable gets swept under the rug — so will your business cash flow

What’s your company’s collections policy? How many days do customers have to pay you back? What will happen to them if they don’t? These sorts of questions are not only essential to the health of your company, but to the amount of cash you have on hand, too. A weak or passive debt collection plan could spell disaster for your business.

A proactive accounts receivable process will play right into improving your business cash flow. For starters, come up with a system that includes clear guidelines around when and how customers will have to pay you back. You might want to incentivize early payments or penalize late ones to further hasten the process.

A quick invoice creation process will ensure your clients know as soon as possible how much they owe and when. Keeping an eye on notoriously slow-paying customers is something to add to your to-do list.  Some companies also perform credit checks on customers or request a bit of cash upfront as part of their invoicing processes. That way, they have a higher guarantee of their accounts receivable becoming viable income.

Discover: 7 Key Invoice Payment Terms and How to Apply Them

5. There’s always room for improvement

Fortunately, as we’ve begun to note, accounts receivable won’t always be a detriment to your business cash flow and, therefore, to your business. Once you have a well-oiled system in place, you’ll have plenty of money to fund your operations, pay staff and perhaps even expand your business.

Start by shrinking the repayment schedule. Even if your customers pay on time, giving them less time to do so will boost your cash flow and remove the pressure from your accounts receivable department.

In addition to sending invoices ASAP, improve training so your billing department understands all your processes intimately. Knowing company procedures and standards will instantly boost a person’s job performance. Employees will be more likely to do things on time, do them correctly and bring back the money you deserve.

Finally, you can improve your accounts receivable and your business cash flow by adopting the tools and technology to keep tabs on it all. Fortunately, we’ve got that aspect covered here at PayPie. With our forecasting tool, you can transform raw numbers into easy-to-interpret metrics to show where you are — and where you’re going.

PayPie currently integrates with QuickBooks Online. Additional integrations are coming soon.

This article is informational only. It does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional.

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Author: Sarah Landrum

Sarah Landrum is a business and career writer and the founder of Punched Clocks (http://www.punchedclocks.com/). Follow Sarah on Twitter (@SarahLandrum) for more tips to grow your business and your career.