Are you watching your accounts receivable climb higher, feeling the strain on your cash flow? An increase to accounts receivable may indicate business growth, but it can also signal potential challenges in your financial management.
So what does an increase in accounts receivable mean? More specifically, how does an increase in accounts receivable affect cash flow? What should you do to address this issue?
You’ve got questions, we’ve got answers. In this guide, we’ll discuss the implications of rising accounts receivable and offer practical tips to effectively overcome it.
Plus, you’ll discover how InvoiceSherpa's innovative accounts receivable automation software can streamline your AR process, turning these financial challenges into opportunities for enhanced efficiency and improved cash flow management.
Accounts receivable (AR) are a critical aspect of any business's financial management, representing money owed to the company for goods or services that have been delivered but not yet paid for.
These sources of income are listed as current assets on the balance sheet since they are expected to be converted into cash within a short period, typically within one fiscal year.
They are legally enforceable claims and can be used to obtain cash before the actual payment is received, either through collection from the customer or by using them as collateral for a loan.
AR is vital for managing a company's cash flow. Efficient management of accounts receivable ensures a steady inflow of cash, crucial for meeting day-to-day operational expenses. If you don’t know why cash flow management is important, we encourage you to read our guide.
A good AR process also reflects the company's credit policy and customer relationship management. Businesses often have to balance between offering credit to attract and retain customers and maintaining sufficient cash flow.
You can learn more about the basics of AR in our blog, such as how to calculate accounts receivable, tips on forecasting accounts receivable, accounts receivable reconciliation guidelines, and more. For now, though, what does an increase in accounts receivable mean?
An increase to accounts receivable can have a range of implications for your business, affecting everything from cash flow to overall financial health.
What does an increase in accounts receivable mean? More specifically, how does an increase in accounts receivable affect cash flow?
An accounts receivable increase can signify a tightening of cash flow. While it represents potential future income, it does not immediately translate into liquid assets.
This situation can create a gap in available funds, making it challenging to cover operational costs. This is how cash flow problems usually start.
A higher accounts receivable may also mean your business is extending more credit to customers. While this can boost sales, it also increases the risk of cash flow shortages if payments are delayed.
On the positive side, a rise in accounts receivable can indicate business growth, with an increase in sales or expansion of your customer base. It suggests that your business is attracting more customers or larger orders.
Conversely, a significant increase might signal financial stress, especially if it results from extended payment terms or customers delaying payments. This scenario requires close monitoring to prevent it from escalating into serious liquidity issues.
Now, let’s talk about what could contribute to an accounts receivable increase. Then, we’ll offer tips on overcoming this issue to get your financial management back on track.
Understanding the reasons behind an increase in accounts receivable is crucial. It helps in determining whether the change is a sign of positive business growth or a red flag indicating underlying issues in credit management and collection processes.
This understanding is vital for taking appropriate measures to ensure healthy cash flow and overall financial stability. That being said, let’s talk about what you should do if you notice an increase to accounts receivable.
An accounts receivable increase requires strategic actions to ensure it doesn't become a financial burden. From taking a look at your invoicing process to tightening up the way you give credit to customers, there are a few things you can do to reign back in your AR to a more favorable balance.
If you haven’t already reaped the accounts receivable automation benefits, it may be time to consider doing so. Automation ensures invoices are sent out promptly and accurately. This reduces delays in billing and helps in faster payment collection.
Automation is a better approach than accounts receivable outsourcing because it’s a fraction of the cost and allows you to remain in control over finances without spending unnecessary time doing the busy work. We’ll talk more about this in a moment, but the best accounts receivable automation software is just a click away at InvoiceSherpa!
Beyond automating invoicing, you should look for ways to improve the process in general. Make sure that invoices are clear and include all necessary details like payment terms, due dates, and a breakdown of services or products provided. Clear communication reduces confusion and disputes over invoices.
Evaluate the creditworthiness of your customers before extending credit so you don’t end up fighting for payment later on. This can involve credit checks or analyzing their payment history.
If you do decide to extend credit, you must establish and enforce clear credit terms. This includes setting credit limits and payment terms that align with your business’s cash flow needs.
Continuously assess and update your credit policies based on customer payment behaviors and broader economic conditions.
Send regular and polite payment reminders as due dates approach. Consistent follow-ups can encourage timely payments.
Develop and maintain firm but fair collection policies for overdue accounts. This may include setting up a structured process for escalating collection efforts. You can consider negotiating payment plans that allow for partial payments over time for customers facing genuine financial difficulties.
We hope it doesn’t come to this, but if necessary, you can learn how to send a bill to collections in our blog. We also have resources on the proper invoice late fee wording as well as how to structure your demand letter for payment.
That being said, let’s introduce the #1 way to avoid these headaches in the first place - optimizing your AR and invoicing process with billing automation software.
Struggling with an accounts receivable increase? We’re here to help. InvoiceSherpa streamlines your invoicing process, ensuring faster payment collection.
Its key features include automated reminders for due and overdue invoices, custom-scheduled reminders via email and SMS, and a user-friendly customer portal for easy payment management.
With integrated payment options allowing for instant credit card or ACH transactions, InvoiceSherpa not only accelerates your cash flow but also simplifies the payment process for your clients. This strengthens key relationships while also ensuring you get paid fast.
Our software is trusted by companies like Patagonia, Smartsheet, Datanyze, and more. You can discover firsthand what makes InvoiceSherpa so special through a 14-day free trial, too - you’ve got nothing to lose.
So, embrace InvoiceSherpa's automation to transform your AR management, reduce manual follow-ups, and significantly improve your business's financial health. Start your journey to enhanced cash flow today!
An increase to accounts receivable can be a double-edged sword for your business. While it may signify growth, it also poses risks to your cash flow and overall financial stability.
Understanding the implications of this increase, from its impact on liquidity to potential strains on operations, is crucial. Implementing strategic measures, such as efficient invoicing, robust credit management, and leveraging tools like InvoiceSherpa, can help you navigate and mitigate these risks.
You can find more small business accounting tips in our blog, such as what to do when an account becomes uncollectible and must be written off, the pros and cons of accounts receivable management services, and what is a good accounts receivable turnover ratio.
At this point, though, it’s time to elevate your invoicing process to avoid the hassle that comes with manual billing and AR management. If you’re suffering from an increase to accounts receivable, you can rely on our intuitive software to get you back on track.
Start your 14-day free trial today by integrating with Quickbooks, Clio, or Xero today!
Posted on January 2, 2024
