When it comes to keeping a small or medium-sized business (SMB) afloat, poor accounts receivable cash flow management can very well become the straw that breaks the camel’s back. Once an invoice is ninety days past due, there’s a 30% chance the receivable won’t be paid at all – that’s not insignificant. In this article, we discuss how an automated cash flow system can help businesses simplify and accelerate their order-to-cash (O2C) cycle and increase cash flow.
In the traditional practice, accounts receivable used to take three to four days to complete one invoice. The document would be produced by hand, then shuffled through a few more hands, and once it was approved it would be sent to the client by mail.
Three to four days was actually an optimal timeline; sometimes it took up to fifteen days from the start of drafting to when the invoice was delivered. By the time the client received the invoice, a new timeline would begin; how long it would take for the client to pay the invoice.
This was (and is still to this day) often subject to delays as well. Often, clients didn’t even pay them. With an influx of clients defaulting on their payments, businesses were accruing a lot of bad debt. A solution was sorely needed, and that solution has arrived.
Automated invoicing offers a variety of benefits to businesses, but for the sake of this article, we’ll discuss the ways it can improve a business’s cash flow.
AR automation ensures that the business’s OTC cycle goes as fast as possible. Once the customer’s information is input into the system, the employee simply has to click to have an invoice generated, and an invoice appears with the client’s information auto-filled. Once the invoice is generated, it is sent to the customer via email.
The client receives the invoice shortly after they receive the goods or use the service your business provided. The product/service they used is fresh in their memory. Besides being fast, simple, and efficient, it just makes sense psychologically that the client would pay the invoice sooner.
It’s not only invoices that can be automated; communications can be automated as well. The task of managing correspondence – reminders, follow-ups, thank-yous – is streamlined by the platform. The user can compose the message as they wish and select how and when the message is sent.
Additionally, the client is given the choice of different payment options. If they don’t want to pay with credit, they can choose to pay by check, ACH, wire-transfer, and even more options (depending on the platform).
Clients are also given the ability to contact your AR team directly to resolve any technical issues or invoice disputes. Both of these last two measures give the client more agency in the transaction, likely leading to increased customer satisfaction.
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A cash flow statement is a record of all incoming money that a business is slated to receive from its ongoing operations. Cash flow statements also include all outgoing money being used to pay for business activities or operating costs.
Cash flow statements cover the major sources of income, including securities (stocks), financing, and accounts receivable (the balances from completed sales). Most of a business’s income comes from its sales.
The purpose of the cash flow statement is basically for the business to ensure their cash accounting is in order. When it isn’t, instead of positive cash flow, businesses can start collecting negative cash flow. That’s when a business has more outgoing money than incoming money. Instead of making money, the business is losing money.
Most people reading this are probably confident enough in themselves to think that negative cash flow would never happen to them. What they may not realize is that negative cash flow isn’t always caused by simple negligence. There are other variables that can cause businesses to lose money without them realizing it.
Take, for instance, if a company delivers a product or service, and the client pays with credit. That sale will be viewed as revenue for the business, but the actual cash may not come in until weeks later. You can easily integrate your ERP's later payment prediction extension with AR automation software to rank your buyers on payment risk.
Sometimes customers default on their payments. If a business is delivering goods and/or services to multiple clients at the same time, chances are high that defaulting or delinquent clients will add up.
No business can insulate itself from these uncertainties. What they can do, however, is utilize tools such as artificial intelligence (AI) and cash flow data metrics. These tools provide a real-time view of where the business may be losing money. With this knowledge, businesses can take proactive action toward ameliorating the problem.
AR automation platforms not only streamline existing processes, but they also find cash inflow and outflow problems that may be overlooked. With a cash management system in place, employees can turn their attention to projects that would be more impactful to the business. Another major benefit is the improved strategic decision-making that comes with the AR automation software. Examples include credit-checks to evaluate how much credit the client should be granted, or data metrics that illuminate patterns that may be causing them to lose money.