Cash flow is the blood line for any business. Business can survive lack of profits, but cannot survive lack of Cash flow. Managing receivables is one of the most important parts of any Small or large businesses. Hence it is important to know about receivable management solutions.
When we start the business, the thing that looks most difficult is Sales. But once we have done Sales, then we are revealed to more difficult part – Receivables. Yes, collecting the due payment from our Buyers is a bigger task, sometimes than the Sales itself.
If working capital is lifeline of the Business, then Managing the Accounts receivables is soul of working Capital.
What does Receivable Management Mean?
Put simply, Receivable Management or Managing Accounts Receivables means collecting the payments due for Sales in a timely manner. When we sell any services, products or solutions to our clients or customers, they owe us the money. Collecting that money is called Receivables Management.
In Accounting terms Our Customers who owe us money are called as “Sundry Debtors”. Yes, they are called Debtors, because they owe us money.
In India, Management of Receivables is also known as:
- Payment Collection.
- Collection Management.
- Accounts Receivables.
In a survey, 90% of the respondents agreed that collecting Sales Receivables is bigger challenge than Sales itself.
What is receivable management?
There are very few businesses, which have the luxury of receiving money before selling, i.e. Selling for advance payments. Most of the Companies sell their offerings on a credit. Which means that they will collect the money after selling.
Although it looks very simple on the face of it, Managing receivables from Debtors can be a very complex task depending on the nature of our business. As our business grows and as our offering gets complex the process of collecting the payments needs to be designed accordingly.
So the entire process of defining the Credit Policy, Setting Payment Terms, Payment Follow ups and finally timely collection of the due payments can be defined as Receivables Management.
Many people might be able to sell, But only few know how to recover money.
Objectives of Receivable Management
In order to keep business running, we need cash. The whole purpose or objective of Receivables Management is to keep inflow of cash healthy.
In other words, these are the objectives of Payment Collection.
- Collect receivables from our sundry debtors.
- Maintain a healthy cash flow for the company, so that it can pay our creditors.
- Have proper Policy for Credit management.
- A working process and mechanism for managing payment follow ups and timely collection.
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Its Importance
Why Receivables management is so important?
- Cash flow is always considered as bloodline of any business organisation. Badly managed Receivables can break the company.
- Most of the companies that go bankrupt have Cash flow problems. Companies with lack of profit can survive, but lack of cash flow is fatal.
- Working Capital is one the most costliest form of capital. One of the ways of calculating working capital requirement can be defined as the difference between Sales and Receivables. Bad collections can mean higher working capital requirements. Which means higher interest costs for the company.
- A reliable and predictable Receivables will ensure steady cash flow management of the organisation. Amounts receivables with no due dates are useless.
Benefits of Accounts Receivable Management
- Better Cash Flow.
- All our Budgets and projections depends on how much we can spend. Predictable cash flow enables us to manage our operations and expansion plans.
- Lower Working Capital Requirements.
- Effective receivables management ensures that our Working Capital requirements are kept at minimum.
- Lowered Interest costs.
- Working capital is also fixed capital, which attracts interest. Lower Debtors will reduce our Interest burden.
- Better Bargaining with Sellers.
- When we are buying any goods or services, we can bargain mainly on quantity or Payment terms. Having a good receivable management provides us with enough cash flow to bargain effectively with our Suppliers.
- Stop profit leakages
- In case of thin margins, just imagine how much more sales we have to do to recover and adjust just one small bad-debt. Non receipt or delayed receipt is the biggest profit leakage any company can have.
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Planning for a Good system
- Defining a clear Terms for Payment
- Having a well defined clear terms of Payments is half the battle won. We might need to have different payment terms based on what we are selling, or quantity or pricing.
- Payment terms should be set right into the Invoice that we send and even the PO that we receive from the customer.
- Having a down payment (or advance payment) is the best option. Most of the time, we have mythical fear that we will lose the customer if we ask for advance payment.
- Well Defined Credit Policies.
- How much credit is to be given and to whom and for how long. Every customer might be thinking that they are different. We need to have a proper Credit Policy to cover every kind of Customer.
- Setting Responsibilities clearly
- Who will follow up and collect the payment? There should be very clear cut policy regarding this. Otherwise, its an ever lasting buck passing exercise and ultimately the company has to suffer.
- In most of the SME cases, assigning the receivables responsibilities to Sales team is a good idea.
- Proper Credit Check Process in Place.
- Having a Credit Policy with no Credit Check in place is absolutely wasteful. Apart from financial documents and Bank details., nowadays there are many credit rating agencies, which provide online Data about the Credit ratings of any particular client.
- It’s always a very good idea to do a market research of the customer before providing them with the credit. If the customer is an existing one then just analysing past history will tell us lot of actionable information.
- There should be a clear policy regarding When to engage legal team for Debt collection
- Various options for paying.
- With many online banking and other options, Now the banking has improved a lot. We should provide as many options to our Customers to make payment, like Bank, Cash, Credit Card, Electronic Funds transfer, Bill discounting, Bill Purchase etc.
- Use Technology
- Firstly, the Technology can be used in Credit Check Process, as discussed above.
- More importantly, deploying a software solution, which makes entire Receivable Management process a lot more easier, with automations and reporting.
- While determining any Receivable management solution, make sure that it has Mobile Application.
- There should be realtime dashboard reporting that we need for smooth operations.
- Regular Ageing Analysis and Action.
- The Customer who go bad, generally don’t go bad overnight. They actually shows a lot of signs of bad debts, before they go bad. But to catch those signals, we need to have proper ageing analysis and monitoring of Receivables.
- Also, there should be clear policy for the next actions. What should the team do, when the Customer does not pay after the bills are overdue?
- Do we have legal team and process in place which is competent enough to take legal actions?
- Outsource the Receivable Process.
- This is very common, for BFSI segment, but not for other businesses. There are debt collection agencies, who have specialised processes and capabilities to make the entire process of Receivables as smooth as possible.
- But this is not a bad idea, as this will enable us to focus more on the other functionality of the business like Marketing, Sales and innovation.
Importance of Credit Policy in Receivables Management
Having a well defined credit policy is the first step in having an effective Accounts Receivables Management System. How do we define Credit policy depends on various factors. Some of the points for Credit Policy are listed below:
- Market practice. In the beginning it is important to follow well established policies in the market.
- Credit Policy as USP. Many Companies choose to provide more lenient credit policy, much better than market to get more business.
- Onboarding a new customer should have a strict emphasis on the credit check.
- There should be proper process and policy on when to stop billing to defaulting customers.
Receivable management solutions
Deploying software for managing receivables is a very good alternative. A good Receivable Management solution should have the following features or capabilities.
- Mobile App.
- Real time information.
- Messages templates for followup
- Store all contracts and related documents in one place.
- Monitoring Due and overdue Receivables.
- Automated Reminders
- Rule based Escalations
- Projected Day wise receivables.
- Projected Sales Person wise (or person responsible for collection) receivables.
- Area wise or any other criteria for analysis.
6 Comments
Thanks for the article
Accounts receivable is a legally enforceable claim for payment held by a business for goods supplied and/or services rendered that customers/clients have ordered but not paid for. …
Good and Very helpful article.
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A real case example of explaining what is cash flow with with examples of good and bad will help
Ok
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Real examples (and case studies) coming up soon
Thanks, Aravind KS Sir. Those things are coming up soon.
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Yes of course
It’s backbone of business
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