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How can businesses use receivables to manage cash flows?

Updated on :  

08 min read.

Receivables directly measure what third parties owe to the business for goods sold or services provided. They help to understand a company’s financial stability and liquidity. It is an important asset that is considered the lifeblood of a business’s cash flow.

Ways to use receivables to manage cash flow in the organisation

Sufficient inflow and outflow of cash are essential for any business to sustain itself. One can generate adequate cash in the organisation by efficiently managing its accounts receivable. Some of the ways that can be used to manage cash flow in the organisation effectively are discussed below-

  1. Try to understand your customer better: One should not hurry to sell the customers on credit. First, assess the potential customer’s ability to repay its debts. Assessing creditworthiness is essential if the order is large. For existing customers, one can check the past payment record. For new customers, one can check the financial statements.
  2. Issue accurate invoices: Try to issue comprehensive tax invoices and accurately mention payment terms, invoice value, taxes, etc. Also, send an invoice at the earliest because any delay in sending the invoice may lead to a delay in receiving payment.
  3. Give easier payment options: Give various options to the customers for payment such as electronic fund transfer, cash, cheque, mobile money, etc. This will make the collection process simpler.
  4. Use accounting software: Use the latest technology, such as cloud-based accounting software, to automatically send payment reminders to the customers as per set timelines. They also store the customer data on the cloud, such as communication details, payment data, etc. 
  5. Automate your communications with customers: Customers appreciate getting reminders before the payment is due. Also, communication plays a key role in the entire purchase process. Using accounting software makes this communication part easy by sending automated emails at regular time intervals.
  6. Set auto alert for non-receipt of payments on time: Set auto alert in the system for non-receipt of payment by the due date. Timely follow up speeds the collection process.
  7. Give rewards for early payments: One can issue rewards or give discounts for on-time or early payments if followed regularly, to improve cash flow in the organisation.

Use factoring option if required: Invoice factoring or invoice discounting helps the business access cash otherwise tied up in unpaid invoices. This improves cash flow in the organisation.