Audit Series Part 2 – Counting Blessings (Not your Bills): What Companies are Doing to Combat Being Cash-Strapped

Written by Gus A. Molina LMC Audit Manager

Maximize your money, minimize your worries. According to a recent QuickBooks survey, 50% of small business owners regularly experience cash flow problems. In this article, we will discuss how companies are staying ahead of collections through clear communication, proactive review, and technology investments.

Connect to Collect

Building strong relationships with your customers and setting clear expectations is essential. Timely follow-ups and consistent communication are key to maintaining these connections. Whether through outsourcing your collection efforts or using in-house representatives, proactive engagement is critical to ensure that remittance is obtained promptly. Monitoring your customers’ payment behaviors closely and quickly handling overdue situations, are crucial to maintaining financial stability and healthy cash flow.

It’s My Money, and I Need It Now

Some companies have realized that they are able to get paid faster by simply incorporating discounts for shorter payment terms, or focusing on extending credit only to individuals with AR turnover below a certain benchmark. In order to explore these strategies, companies need to invest in technology and adopt a forward-thinking approach. Having the right staffing, ERP system, and internal processes in place are all essential elements needed to gain accurate insights and make informed decisions about extending credit.

Realism in Receivables: Don’t Forget About Your Allowances

Just as taxes erode the bottom line, allowances for chargebacks, shipping provisions, and bad debts should always be considered to ensure accurate cash flow forecasting. The ultimate amount that will be collected will be after all anticipated dilution. Navigating the complex world of financial estimates can be tricky and may be a topic of discussion with a financial advisor.

Consider Factoring

Many companies assign their receivables to a factor which can help in many ways. The company no longer has to employ people to work on the receivables and offset payments against invoices, as this is all part of the factor’s function. By factoring, business owners have outsourced the need to credit check and set credit limits with their customers, as that is also part of what the factor does. The company is able to improve cash flow since factoring allows a business to collect a portion of the invoicing, typically 85%, almost immediately from the factor, without having to wait out the invoice terms which allows companies to optimize access to capital. Business owners are also able to sleep better, since the factor is taking the risk of a bad debt. Companies also find that customers who are concerned about their credit score are more inclined to prioritizing factored invoices for payment. The downside is the cost of factoring which includes the factoring fee as well as the interest on the borrowed funds.

No matter which methodology is used, it is crucial for companies to tackle cash flow challenges. Talk with your LMC advisor, should you want to discuss various methods to strengthen receivables management.