Tips to Optimise your AP/AR Strategy for a Better Cash Flow

Dameli Bozzhanova04 Aug 20215 mins

Cash flow is one of the main struggles for business owners. Sometimes optimising cash flow can lead to a better chance of surviving during the crisis by increasing your revenue. The best part is that healthy cash flow is entirely in the hands of the business owners.

During an uncertain time, like now, small and medium-sized enterprises (SMEs) do not have the luxury of an abundance of cash. In order to withstand the COVID-19 induced crisis, firms need to squeeze any spare cash they can. The strategic approach towards the Accounts Payable (AP) and Accounts Receivable (AR) can make a big difference.

What are AP and AR?  

In accounting terms, accounts payable is the money your business owes to its suppliers. It is recorded as a liability on the balance sheet. On the other hand, the cash that your customers owe for the supplied goods or services is recorded in the asset part of the balance sheet under accounts receivables. Even though AR is an asset and relatively liquid (possible to turn into cash quickly) it is still not great for the business’s cash flow. Some clients might take advantage of you not reminding them to pay an invoice and pay several months late. This put additional struggle on the business as you have your own regular invoices coming, monthly salaries, purchases of stock, and etc.

A whopping 41% of small business owners do their own finances and accounting according to research. So, we have decided to highlight the most important tips on improving the cash flow through effective AP/AR management and how technology and automation with that.

When is the Perfect Timing to Pay Your Invoices?

The optimal Accounts Payable strategy comes with direct financial benefits. Some suppliers offer discounts for early payment, or contrary, charge penalties when the payment is past due. The key is to find the perfect timing. You do not want to pay the invoice too early, because you want your cash to stay on your accounts, but also you want to benefit from an early payment discount. So, the best strategy would be to pay a day before the discount expires.

However, if you will struggle to pay other expenses because you made this payment, it is better to wait, as the discount might be smaller than the penalties you might face for missing on paying for other labilities. You might want to take advantage of the interest-free credit line to pay for your AP. But keep in mind when does the interest-free period ends, and return the borrowed amount prior to that.

Automating Your AP

Not only the accountant (or another responsible person for financial transactions) will spend a lot of working hours on finding the perfect timing and monitor deadlines but also would spend an enormous amount of time manually processing and paying the invoices.

The manual payment of the invoices includes many steps that vary from one organisation to another. Usually, they are preparation of an invoice, passing it to the approver, manual approvement, uploading the invoice into the cloud storage, paying the invoice, emailing the supplier notifying about the outgoing payment, and etc. Not only this process is laborious, but also results in many mistakes on the way. According to the Payables Insight Report, 33% of the surveyed SMEs stated that their main pain point of the manual AP handling is the errors and mistakes. More than half overall stated that manual handling is their pain point.  

The AP automation will not only improve the collaboration of your employees and will increase the efficiency of staff, but also will reduce inaccuracies. The invoice will be automatically prepared, and sent to the approver, who digitally will be able to sign which in turn will initiate the payment of the invoice with automatic confirmations sent to the supplier. Timely payment and communication with your suppliers will also contribute to better relationship building.

How to Optimise Your Accounts Receivables?

Small and Medium-Sized businesses often face invoices past due by their clients.  According to the UK Federation of Small Businesses, 62% of payments were late. Moreover, the invoices past due spiked all over Europe experiencing a year-on-year increase between 25% to 82%! Late payments are detrimental to the financial health of the company. They may cause cash flow problems, so it is the duty of the CFO, credit controller, or a CEO to minimise the days sales outstanding (DSO).

To start, it is important to clarify the terms of payment. State when is the deadline for paying the invoice. The payment period can be one month, however, the statistics show that 75% of businesses state 2 weeks as standard payment terms.  

Secondly, it is useful to send a reminder to the customer prior to the deadline of the payment. If your business already has several clients with overdue payments, then it is useful to prepare Aging Reports. The report will highlight what proportion of payments is delayed and for how long (0-30 days, 30-60 days, etc.) Then the credit controller or an account manager can start chasing the clients. However, this task is daunting and stressful for many employees.

Automating Your AR

Automating the account receivable is one of the best and easiest things you can do for a healthy cash flow. The manual preparation of invoices is not only time-consuming, stressful for your employees, but also not sustainable. Besides, manual invoices are prone to errors. More than 60% of late invoices are due to incorrect invoices.  

The great news is that AR automation is now possible with the help of modern technology. Kolleno offers a cloud-based software extension that will help your business to speed up the collections. Our SaaS solution is compatible with all major Accounting Software that is usually used by SMEs. The white-label solution will manage your collections process. It will prepare an automatic invoice, fully branded in accordance with your corporate style. Then the software will send the reminders on an optimal day prior to and past the payment deadline analysing the past behaviour of the client with the help of the AI algorithms.

In case of late payments, Kolleno will send automatic letters or messages, via multiple communication channels using the most appropriate tone-of-voice. There are many other features that will help to make your collections more efficient. Contact Kolleno and learn how we will help your AR automation.