Managing Cash Flow: Strategies For Controlling Investments In Receivables

Controlling investment in receivables is a critical aspect of financial management for any business. Receivables management refers to the planning and monitoring of debts owed to a business by its customers. Effective control of investment in receivables helps businesses increase cash inflow, reduce bad debts, and improve relationships with customers. It involves understanding the basics of accounts receivable, including the creditworthiness of customers and the development of credit policies. By analysing accounts receivable, investors can gain insights into a company's financial stability and liquidity, making informed decisions about its investment potential.

Record each transaction

Recording each transaction is a critical aspect of maintaining accurate financial records and managing investment in receivables. Here are some detailed instructions and examples to illustrate the process:

Recording Transactions in the Journal:

Each transaction should be recorded in a journal using relevant account titles such as Cash, Accounts Receivable, Office Supplies, Prepaid Insurance, etc. For instance, if a company receives cash from a client and issues a common stock, they would debit the Cash account and credit the Common Stock account by the same amount.

Posting to T-Accounts:

After recording transactions in the journal, the next step is to post them to the corresponding T-accounts in the ledger. For example, if a company purchases office supplies and furniture on account, they would debit the respective accounts (Office Supplies and Furniture) and credit the Accounts Payable account.

Preparing a Trial Balance:

Finally, a trial balance should be prepared to ensure that the total debits equal the total credits. This involves listing all accounts with debit balances on the left and credit balances on the right, then calculating the totals for both sides. This step confirms the accuracy of the ledger and ensures that the books are balanced.

Recording Receivables:

When a company provides goods or services to customers on credit, it creates accounts receivable. These are recorded as assets on the balance sheet because there is a legal obligation for the customer to pay. Accounts receivable are considered liquid assets and are part of the company's working capital. For example, if a company sells $500,000 worth of goods on credit, they would record this as a receivable by debiting the Accounts Receivable account and crediting the same amount to the Revenue account.

Handling Promissory Notes:

In some cases, customers may sign promissory notes to settle overdue accounts receivable. When this happens, the business debits notes receivable and credits accounts receivable by the same amount. If the customer pays according to the terms, the cash received is debited, the notes receivable are credited, and interest revenue is also credited if applicable.

By diligently recording each transaction, companies can maintain accurate financial records, monitor their accounts receivable, and make informed decisions about their investment in receivables.

Track records monthly

Tracking records monthly is an essential aspect of controlling investment in receivables. It involves regularly studying financial data and information to gain insights into the business's financial health and performance. Here are some detailed steps and considerations for effectively tracking records monthly:

Data Collection and Organisation:

Use tools like spreadsheets to systematically collect and organise financial data. Record all transactions, including direct expenses, fixed bills, and revenues from products and services. Also, include future expected receipts. This comprehensive approach ensures you capture the complete financial picture.

Monthly Analysis:

Studying the monthly data allows for a deeper understanding of the business's financial processes and performance. You can identify trends, such as whether the number of accounts is increasing or decreasing, and assess revenue spending. This analysis helps in making informed decisions and strategies to optimise the business's financial health.

Credit Evaluation and Control:

Tracking records monthly is crucial for credit evaluation and control. It helps finance managers assess customer creditworthiness and determine eligible credit amounts. By regularly reviewing customer accounts, you can set appropriate credit limits and periods, reducing the risk of bad debts and bankruptcy.

Maximising Profit and Competitiveness:

Monthly tracking helps identify areas to maximise profits. For example, understanding the credit facilities offered to customers and their impact on sales can inform strategies to increase sales volume. Effective receivables management can also attract the attention of leading companies, helping your business remain competitive in the market.

Tax Compliance and Recordkeeping:

Maintaining accurate and up-to-date records is essential for tax compliance. Monthly tracking ensures you have the necessary information for tax returns and can simplify the process. Keep hard copies of key investment records, transaction confirmations, and end-of-year summaries. Proper recordkeeping also provides proof of investments, amounts, and dates, which is crucial for resolving any issues or disputes.

In conclusion, tracking records monthly is a vital aspect of controlling investment in receivables. It provides a detailed understanding of the business's financial health, aids in decision-making, ensures tax compliance, and helps maximise profits and competitiveness. By regularly reviewing and analysing financial data, businesses can make informed choices to optimise their financial strategies and performance.

Negotiate accounts

Negotiating accounts is a critical skill for maintaining a healthy cash flow and prosperous business. Here are some strategies to negotiate accounts receivable effectively:

Master Payment Term Negotiations

Understand the significance of favourable payment terms. These terms ensure faster payments and reduce the risk of financial strain due to late payments. Clear, concise, and reasonable payment terms create a framework that supports financial stability and good customer relationships.

Know Your Client's Payment Cycle

Before negotiating, understand your client's payment process. Aligning your terms with their payment cycle can facilitate smoother transactions. For instance, offer a standard 30-day term while providing an early payment incentive, such as a discount for payment within 15 days.

Offer Different Payment Options

Provide a range of payment options to increase the likelihood of timely payments. This flexibility is advantageous for a diverse customer base. For example, consider bi-weekly or monthly payments, depending on the client's circumstances.

Emphasize the Consequences of Late Payments

Remind customers of penalties for late payments to encourage timely payments. Clearly state the repercussions, such as involving a debt collection agency, to incentivize customers to pay on time.

Be Prepared to Compromise

While aiming for the best terms for your business is important, be ready to negotiate and find a middle ground that satisfies both parties. Effective negotiation is about finding a solution that works for everyone.

Communicate Value

Clearly articulate the value of your products or services, and explain how favourable payment terms benefit both parties. This clarity can incentivize customers to agree to your terms, recognizing the mutual benefits.

Leverage Positive Relationships

If you have a good history with a client, leverage this relationship during negotiations. Clients who value your services are more likely to agree to terms favourable to you. Use this relationship to your advantage to secure better payment terms.

Understand the Debtor's Situation

Before initiating negotiations, gather information about the debtor's financial health and any challenges they face. Review their payment history, creditworthiness, and past communication related to the debt. This helps tailor negotiation strategies, fostering empathy and a more constructive approach.

Build a Collaborative Approach

Encourage open communication with the debtor, actively listening to their concerns and challenges without judgment. Shift the focus from blame to problem-solving, exploring options for settling the debt together. This creates a positive and cooperative atmosphere during negotiations.

Offer Flexible Settlement Options

Recognize that each debtor's financial situation is unique, and provide alternative payment solutions to accommodate their circumstances. For example, propose customized payment plans or consider discounted settlement amounts for older accounts.

Establish Clear Terms and Agreements

Clearly outline the specific payment terms, amounts owed, due dates, payment methods, and any other relevant details in writing. Request the debtor's confirmation of the agreed-upon terms and obtain their signature or acknowledgment to solidify the agreement's legitimacy.

Automate control activities

Automating control activities can be a powerful way to streamline your accounts receivable processes and improve overall efficiency. Here are some ways to automate control activities effectively:

Electronic Invoicing:

Digital invoices are a significant improvement over traditional paper invoices. Emailed invoices arrive instantly, reducing your turnover time by several days. This not only speeds up communication with your customers but also eliminates postage costs, saving time and resources.

Customer Communication:

Automation solutions allow for seamless customer communication. In addition to sending invoices, you can electronically transmit supporting documents and receive communications from customers within the same workflow. This includes sending payment notifications, reminders, and emails to ensure timely collection.

System Snapshots:

Accounts receivable automation ties together all relevant information in one place. Each workflow view contains supporting data such as invoice details, customer information, communication history, shipping documents, payment options, and aging tasks. This improves visibility and control, making it easier for your team to manage and categorize workflow information.

Organized Control:

Automation solutions can be configured to meet your team's specific needs. The intuitive process improves visibility and control, allowing your staff to create and categorize workflow information efficiently. For example, AR clerks can view invoices by age or by client, depending on their requirements.

Relevant Reporting:

Automation solutions often include reporting features that provide valuable insights to colleagues outside the accounting department. With automation reporting, your accounts receivable team can quickly generate ad-hoc reports and export data to various formats, making it easier to share information with other departments.

Dunning Mechanism:

Dunning is a systematic method of communicating with customers to guarantee collections. It is particularly useful for unsuccessful transactions or declined credit cards for online payments. Automation solutions can handle dunning by uncovering the reasons behind failed payments, segmenting customers based on payment patterns, and proactively engaging with different customer cohorts.

By implementing these automated control activities, you can improve the efficiency of your accounts receivable processes, reduce human errors, and make more informed financial decisions.

Understand creditworthiness

Understanding the creditworthiness of your customers is key to controlling investment in receivables. Creditworthiness is a measure of how likely a customer is to default on their debts, or how worthy they are to receive new credit.

Lenders will assess a customer's creditworthiness by looking at their credit score and credit report, which includes their repayment history, credit utilisation, and debt-to-income (DTI) ratio. A high credit score indicates high creditworthiness, while a lower score indicates lower creditworthiness. Lenders will also look at a customer's payment history, which accounts for 35% of a FICO credit score.

You can improve your understanding of your customers' creditworthiness by checking their credit reports and scores. The three major credit bureaus that compile credit reports are Experian, Equifax, and TransUnion. You can request a free copy of your customer's credit report once a year from AnnualCreditReport.com, or use a free credit monitoring site like Credit Karma or Credit Sesame.

• Income and debt: Lenders will verify a customer's income and understand their overall debt payments, including loans, credit cards, rent, or child support.
• Credit score: A customer's credit score is one of the most important factors in determining their creditworthiness. A higher credit score indicates responsible debt management skills and a higher likelihood of meeting payment obligations.
• Payment history: A history of on-time payments improves creditworthiness, while late or missed payments reduce it.
• Credit utilisation: Keeping credit card utilisation rates below 30% (with 10% being ideal) improves creditworthiness.
• Length of credit history: Lenders prefer to see a longer credit history, as it provides more data to assess creditworthiness.
• Types of credit: The types of credit a customer has access to, such as credit cards, loans, or lines of credit, can impact their creditworthiness.
• New credit applications: Multiple recent credit applications can negatively impact creditworthiness.
• Collateral: The use of collateral, such as a car or house, to secure a loan can improve creditworthiness.
• Down payment size: A larger down payment demonstrates a stronger financial position and can lead to lower interest rates.
• Co-signer: Adding a co-signer with strong creditworthiness can improve a customer's creditworthiness.

By understanding these factors, you can make more informed decisions about extending credit to customers and better control your investment in receivables.

Frequently asked questions