Best Practices for Working Capital Optimization of Accounts Receivable

Ashish M. Shaji

13 Sep, 2022

No matter what business structure is in place, it is critical to have a productive accounts receivable strategy to optimize cash. No business can function until it has optimal working capital, and it’s possible when the accounts receivable process is as per the company’s situation.  In this article, we shall discuss the best practices for working capital optimization of accounts receivable.

Significance of working capital optimization of accounts receivable

Some of the benefits of streamlining the accounts receivable process may take time, but many other attributes manifest promptly. It can be seen in the form of increased liquidity by protecting existing capital from potential wastage. Moreover, businesses operate more seamlessly with increased capital and reduced debt.

As far as streamlining the accounts receivable process is concerned, you should get started as quickly as possible without any delay. This includes sharing the payment policies with client during the initial stage itself.

Tips to improve Accounts receivable and working capital optimization

Streamlining the process may seem tricky at first, but it can be easily done by leveraging the following strategies:

• Precise management of Customer data

In order to set up and maintain a productive accounts receivable process, centralize the primary data process so that the customer accounts and information are accurate. For instance, when the addresses of the customer are invalid, it causes delivery of the invoice to an incorrect address, making the process of collection more complicated.

Therefore deeply examine the customer’s account periodically in order to identify any issues like unusual terms of payment, credit limits and discounts. Any alteration to the customer data must be backed by a document for future reference. The firm must pay attention to set up an effective control to minimize data manipulation.

• Adopt a customer-friendly approval process

It is evident among businesses that they form an unproductive credit protocol to increase sales, thus resulting in compromised cash flow management. Extending credit is not bad for businesses unless it doesn’t impact company’s working capital^[1] or cash flow management.  The firm should leverage a definite process for the approval for extending credit.

The process must show the entire workflow of the application process, the condition under which an account is put on hold, along with guidelines related to evaluation and overriding of credit limits. Consistent audit should be done to identify the pain points.

• Incorporate efficient billing process

Each company’s process of billing paves a roadmap for either productive or inefficient invoice management. The invoice process should be optimized to attain higher accuracy as an error can have adverse impact on the overall productivity and profitability. Also, it is vital to deliver an invoice in a timely way along with defining the way they are created.

Leverage the latest technology to digitize the invoice process. It can prove to be a great solution. Accounts having errors must be pointed out with a report highlighting the primary cause for efficient dealing.

• Refine the cash application process

When payments reach company, they should be attached to the legit invoices and the valid customer. It can help during future conflicts. Payments should be applied timely in order to classify the current and past accounts.

The process of cash application can be streamlined easily with minimal complications by giving clients confined payment alternatives. The journal entries should be recorded accordingly and beforehand with respect to cut off dates.

• Mitigate inefficiencies from collection process

If you want a seamless cash flow management, then optimize the accounts receivable process according to the existing conditions. A proactive approach in this regard should be employed to aid collection efforts.

Additionally, setting up a production process to negotiate payment plans is necessary to ensure compliance with the company’s objective. Automation of the entire process should be done with the help of latest technologies in order to reduce chances of mistakes.

Conclusion

A firm can better its working capital by converting its current assets into liquidity. For instance, if a firm efficiently oversees its accounts receivable and inventory, then it can increase the cash flow. Likewise, if a firm sets up supplier friendly credit terms with its vendors, firms shall have an advantage of having an increased working capital.

Read our article: Importance of understanding Cash Conversion Cycle to estimate Working Capital Requirements