7 Deadly Cash Flow Management Sins Mid-Market Businesses Should Avoid

What you’ll learn

  • Regular cash inflows are necessary for the survival of your business
  • Accounts receivables form the core of your cash flow and managing AR well is crucial
  • Tackle common cash flow mistakes using automation technologies

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Cash is the fuel for your business’s growth engine. Without adequate cash flow, your day-to-day operations may get stalled. You’ll then have to rely on short-term bank loans or other financing options to keep your business running. But there are costs attached to such financing methods. Small and mid-market businesses that run on tight resources find it more difficult than enterprises with deep pockets to thrive if cash doesn’t flow in as planned. By avoiding common cash flow mistakes, you can avoid extra costs and run your business smoothly. Accounts receivables form a core part of your cash inflow. Challenges in accounts receivable management affect your cash flow adversely, resulting in a shortage of cash in hand. The longer your accounts receivables stay on your balance sheet, the lesser the cash you have at hand to spend. In this article, we examine cash flow mistakes that revolve around poor accounts receivables management practices. We also offer some tips on how to strengthen your cash flow management. Cash flow management mistakes

7 deadly cash flow mistakes due to poor accounts receivable management

One of the largest contributors to poor cash flow is uncollected or past-due accounts receivables. Here’re some deadly mistakes that your invoicing and collections teams make when managing accounts receivables, overdue invoices, and credit limits for customers, resulting in unpredictable and poor cash flows.

1. No proper system for collection and delivery of invoices

Do you prepare invoices by hand? Do your invoices have a standard template or do they follow any random format based on the person who’s preparing it? How do you determine the amounts due from customers when you create the invoices?

If you haven’t yet standardized your invoicing and collections processes, you will see an increase in bad debt due to haphazard AR processes. Invoicing and collections are at the heart of the accounts receivables process and getting them right is crucial.

Invest in AR automation solutions to standardize your processes. Train your receivables team on the different workflows within AR management. Ensure that you have the right point of contact at client companies, know the cash cycles of your clients, and do not face undue deductions because of wrong invoices.

2. Extending credit indiscriminately

Do not commit the mistake of overlooking clients’ credit profiles in your desperate bid to win new accounts and close sales early. Taking unnecessary risks with clients who have a poor credit history or over-extended credit limits could lead to cash flow woes later on.

47% of credit sales are paid late

Have custom credit policies for each of your clients to ensure better customer relationships and lower credit risks. Whenever you onboard a new client, contact references for their payment histories and perform a thorough credit check. This way, you’ll be able to fully understand the risks and can make better-informed credit decisions.

Automate credit risk management and customer onboarding with AR management solutions like ours. Our credit risk monitoring solutions provide you with up-to-date credit risk reports, scoring models, and real-time alerts to clients’ financial health.

3. Treating AR as yet another accounting function

Receivables management is often treated as just another accounting function that helps balance the books. To be able to ace your AR operations and optimize cash inflows, you should look at AR as a strategic area of your business.

Accounts receivables management is a client-facing function. It involves interactions between your collection agents, AR executives, and client contacts. Identifying strategies to increase client retention by offering them a seamless payment experience is hence crucial. One option could be to offer self-service customer portals and multiple payment methods.

Also, invest time and resources to plan your collections and credit strategy. Use predictive analytics tools to build models that can accurately tell you when to expect clients’ payments.

4. Manual remittance matching and data tracking

Errors in data entry can cost you millions of dollars (e.g. $100000 in place of $10000000!). Manual data entry and data matching are tedious and error-prone. If you do not equip your AR team with the right tech tools to automate cash reconciliation and remittance matching, you are once again committing a grave mistake.

49% of businesses aren't able to complete their responsibilities

Use AI-based smart tools to collect and match incoming payment information from emails, bank records, customer portals against the correct invoices. If you want to check how an AI-based remittance matching tool works, check out our AI-based Cash Application Software. We enable 95% straight-through cash posting and 100% savings in lockbox data capture fees.

Take a demo of our AI-based Cash Application Software

5. Letting accounts receivables age too long

The longer your accounts receivables take to collect, the bigger a threat they become to your cash flow. Accounts receivable aging refers to the length of time an invoice has been outstanding, often categorized into buckets of 30 days. If you delay contacting your customers for payments, the longer the age of the invoice and the lower is the chances of you getting paid.

Average payment period: 27 vs 34 days

Create weekly aging accounts receivables reports to stay on top of things and identify customer default chances. Send proactive reminders to customers about their payment dates and dues. Embedding payment links within the invoices can help nudge customers to pay sooner.

As soon as a receivable is past 30 days due, you should take sterner actions. This can be with a phone call or a statement notice. All these steps can help remind debtors of their obligation to your company and prevent cash flow challenges.

Download our Excel-based Accounts Receivable Aging Report Template

6. Not tracking your cash position

Many entrepreneurs and business executives fail to monitor their cash flow on an everyday basis. If you are among those executives who look at your company’s bank statement and tax liability only at the end of each month, you’re likely to miss patterns that may indicate a cash flow challenge.

Use a dashboard to keep track of all your accounts receivables, accounts payables, and tax liabilities. Accounts receivable collections are harder to predict and track compared to accounts payables because of external stakeholders involved in the former.

Use AR automation tools to track and predict the number of customers and goods sold each month and the invoices due. Monitor invoice payment status and automate remittance capture to get up-to-date data on your cash balance.

82% of small businesses are challenged by cash flow worries

7. Limited long-term outlook of cash flows

The practice of accurate planning makes a finance team perfect! Your finance team including the accounts receivable function should be able to see well into the future and predict cash shortages, good investment opportunities, and bad debt chances.

Efficient cash flow planning will help you to tide over financial challenges and remain competitive. Use data models that can help you forecast your cash flows months in advance. You can then revise or rework your invoicing, collections, and credit risk strategy accordingly.

Redemption strategies: Embrace technology

How can you redeem your business from these cash flow mistakes?

In today’s digital world, your redemption lies in embracing technology. Do not wait till you run out of money to fix your cash flow challenges. AR automation software allows you to eliminate manual steps and streamline operations. It ensures that no invoices get missed. Real-time data management features available in AR automation software help you to get the latest details on clients’ financial health and predict credit risk outcomes more accurately.

Here are some of the advantages of automating your accounts receivables processes:

  • On-time dunning to all the accounts on which payments are due
  • Priority collection lists to ensure that your team focuses on the right customers for collections (larger amounts due, long overdue accounts)
  • Reduction of operational strain on the whole finance team due to better bank and cash reconciliation
  • Improved customer relations due to a better collection experience (no frequent calls to regular-paying customers)
  • Lesser strain on finance planning and significant reduction in opportunity costs
  • Increased coordination between sales and finance teams as each understands the other teams’ priorities better

At HighRadius, we offer cloud-based Autonomous Software for the Office of the CFO. Our AI-powered solutions can transform your order-to-cash, receivables, and treasury processes.

Schedule a demo to see our solutions live in action.

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HighRadius Integrated Receivables Software Platform is the world’s only end-to-end accounts receivable software platform to lower DSO and bad-debt, automate cash posting, speed-up collections, and dispute resolution, and improve team productivity. It leverages RivanaTM Artificial Intelligence for Accounts Receivable to convert receivables faster and more effectively by using machine learning for accurate decision making across both credit and receivable processes and also enables suppliers to digitally connect with buyers via the radiusOneTM network, closing the loop from the supplier accounts receivable process to the buyer accounts payable process. Integrated Receivables have been divided into 6 distinct applications: Credit Software, EIPP Software, Cash Application Software, Deductions Software, Collections Software, and ERP Payment Gateway – covering the entire gamut of credit-to-cash.