When it comes to improving cashflow you shouldn’t just rely on others

Cashflow management still remains a key concern amongst smaller businesses, but helping matters along has been the increased engagement from larger companies with the Prompt Payment Code. 1,300 organisations and counting have already signed up a commitment to paying their suppliers to agreed terms that are fair and reasonable.

Whilst the Prompt Payment Code is not new ‘legislation’, it does show UK business rallying to support better practice. But the best way to support suppliers or customers, is to ensure a business has the information and tools required to develop mutually beneficial trading relationships.

At ReadSoft we recognise that many small businesses have struggled as a result of late or unpaid invoices, and while we heartily encourage business sign up to the Prompt Payment Code, smaller companies simply cannot rely on the good will of larger businesses. Balancing the books is essential to your business, but the staff time it takes to do this would be better deployed on generating new business for your company. The frustrating thing is that most non-payment is likely to be the result of poor or slow administration – in other words it is not that your customer cannot pay but that they have probably lost your invoice it in a morass of paperwork.

What you can do is ensure that your own administration is on the ball.  Regularly remind customers that invoices are due, chase them for a date for payment and build a relationship with their accounts team.  Make sure they have your bank details and other critical information. This should help to give you a better idea if they cannot pay or if they simply need to tighten up administration.

And being small no longer means that you are at a disadvantage when it comes to technology. You simply need an internet connected PC, tablet or even mobile phone, because new developments in Cloud computing allows you to only pay for what you need, so there is no capital investment.

ReadSoft now offers an automatic invoicing service which we call ReadSoft Online, which lets you scan, upload and send documents and invoices. The software automatically extracts important data, verifies it, and sends it to relevant applications. It also stores the information remotely for you to access at will.  You get access to the same financial software available to big companies, which automates your invoicing, improves your operations and makes you look more professional. Plus, you have the freedom to scale a service up or down as your business demands it so you can plan for growth or tighten the purse strings as required, and keep a tight control on that all important cashflow.

Regaining control of Accounts Receivable

Inefficiencies in the finance function can critically impact the bottom line and the viability of a business to grow and flourish. For Accounts Receivable (AR) functions, month end can be a time to dread, requiring additional staff be reallocated from other business critical functions.

A good barometer for the likelihood of bad debt provision is Day Sale Outstanding (DSO) giving the number of days it takes on average to turn a sale into cash in the bank. The problem is there are often no targets around the quality of the sales ledger, the number of queries resolved, or the reduction of costs. How robust a company’s position is will be defined by the impact of unallocated cash. Unfortunately these metrics often go unmeasured and uncontrolled.

Overall, a sales ledger should be as clean and as accurate as possible; after all it is the record of what is owed, by whom and when it is due for payment. Any unallocated cash more than seven days old is a sure sign of poor control. Unallocated cash on account occurs when goods or services have been provided and a customer has paid for them. The cash receipt has been matched to the customer’s account but not the payment. Unallocated cash on suspense/holding account is a case where goods or services have been provided and a customer has paid for them, however the cash receipt has not been matched to either the customer’s account or the invoice. In these cases the number and value of credit notes issued becomes a key indicator of poor operational delivery, a lack of quality of goods and service provided, and errors in pricing or invoicing.

So what changes can be made to the way credit with customers is managed and controlled to deliver a more effective business and better understand and control cash receipts?

First and foremost it is about understanding customer payment behaviour – particularly how and when customers pay. If a customer is paying beyond terms, what pattern emerges?  Like your own organisation, your customers will have their own behaviours. But this does not mean just letting customers pay when they want. Rather it is about making use of available metrics to better analyse and understand payment patterns and trends, and then align your systems and process with those of your customers.

Such behaviour led approach can save money through reduced credit management costs and can also improve cash received. It focuses time and effort into debtor analysis and makes credit management a scalable function rather than a fixed cost. By removing the ‘noise’ associated with unmatched credits it should be possible to bring an end to the administrative activity that detracts from the real job: to manage credit limits and collect overdue cash. So the first step is to put in place straightforward metrics that help to better understand the issues.

When the finance organisation is understood as a series of processes, it is possible to monitor the costs of each transaction. This helps to appreciate the value that each of these processes adds, and whether there is a more efficient approach.

The vast majority of these finance processes can now be simply and effectively automated, providing a stable and reliable set of metrics, regardless of the day of the month.  One of the most effective means of automation is though intelligent document scanning and workflow processing. System automation can halve the cost of cash allocation per invoice and deliver greater levels of control than previously available. Unlike the traditional manual process which is almost impossible to performance manage; an automated process constantly updates the number of receipts remaining unallocated and their status.

This helps to provide a greater accuracy to allocation of funds and in many cases, more than 98% of receipts are allocated to invoice first time. This then enables credit control personnel to focus on a very small number of queries, ensuring that these are dealt with quickly and efficiently, vastly improving the cash position of a company.

Download the whitepaper:
Accounts Recievable: Making Month End Just Another Day