Poor Cash Flow, Overdue Payments Thwart Your Accounts Receivable Processes?

Accounts receivable is the lifeblood of any business. Establishing a proper account receivable management process allows you to take control of your cash flow and streamline payments and invoicing. However, many find the process daunting.

In this article, we will venture into the importance of accounts receivable, the profound impact of late payment on an organisation’s revenue stream, and how SaaS financial management solutions help minimise the possibility of overdue payments and improve the organisation’s overall financial health.

Accounts Receivable Management

Content

What is accounts receivable?
How overdue payments dramatically exert ripple effects on your business
How SaaS accounting solutions can provide powerful accounts receivable management and minimise overdue payment

What is accounts receivable?

In the realm of accounting, accounts receivable (AR) refers to the amount of money a company should receive from its customers from the sales of goods or services that have not been paid yet.

When customers purchase your products on credit, the amount owed will be recognised in the accounts receivable section of a balance sheet. Once the payment is complete, the company will debit its accounts receivable and credit its cash account.

Accounts receivable is an integral part of any bookkeeping process. It helps businesses keep track of unpaid debts, calculate profitability, and plan future cash flow. This enables businesses to gain a comprehensive understanding of their actual income.

However, not all businesses have accounts receivable, as some only accept payment in advance or cash sales. On the other hand, for many businesses, especially those in the retail and service industries, accounts receivable serve as a significant source of revenue.

Back to the top

How overdue payments dramatically exert ripple effects on your business

Healthy cash flow empowers businesses to seize growth opportunities and design lucrative investment strategies. Therefore, when cash flow is disrupted by unexpected delays in payment from customers, it can have catastrophic consequences for your financial situation and crumble your business operation.

According to Ignition’s 2022 State of Client Engagement [1], 94% of accountants and bookkeepers need to chase clients for late payments. On average, 31% of invoices are paid late.

Back to the top

1. Delay the deployment of new projects and investment

In today’s business landscape with fierce competition, wise investment and opportune project launches are the keys to helping businesses stay ahead of the curve. To achieve this, adequate financial and human resources should be well-allocated to ensure seamless project deployment.

Therefore, when your business is unable to receive timely payment from customers, it will be challenging to continue production, deliver services, or invest in new ventures due to the lack of necessary working capital.

In other words, you may have to partially halt your business growth and decline requests and orders, and the long-term impact can be catastrophic. As a result, your company may miss golden opportunities to leverage competitive advantages and enhance its revenue stream.

Back to the top

2. Increase stress levels

The constant burden of unpaid invoices not only hampers business performance and productivity but can also lead to increased levels of anxiety for business owners who are constantly juggling expenses and operations.

According to Accounting Insight News [2], over 75% of UK business owners are struggling with sleepless nights, and 22% will chase unpaid invoices as soon as they wake up and start new working days.

Moreover, chasing after late-paying clients and delinquent accounts prevents your organisation from focusing on core business activities and seeking growth opportunities. Since you are distracted, you might not notice any potential problems that build up until it is too late.

Back to the top

3. Impose a financial burden on payroll and operation expense

When a business relies heavily on customer payments that are consistently delayed, it poses significant challenges to maintaining day-to-day operations and covering essential expenses. Operational costs, utilities, and employee salaries become increasingly difficult to manage without the necessary cash flow.

In such circumstances, businesses may find themselves in a precarious situation where they struggle to meet their financial obligations. To bridge the gap, they may resort to taking out loans or lines of credit, which can lead to a cycle of increasing debt.

While taking on loans may provide temporary relief, it is not a sustainable solution, especially for small and medium-sized enterprises (SMEs) or startups with limited budgets. Debts can quickly become overwhelming, hindering the ability to invest in growth, innovation, and long-term sustainability.

Managing late payments also requires additional resources. The process of tracking and following up on overdue invoices can be time-consuming and labour-intensive. This diverts valuable time and effort that could be better utilised for strategic planning, business development, and improving operational efficiency.

Furthermore, late payments can put a strain on the business's finances. Suppliers may demand faster payments or impose stricter terms, impacting the company's ability to negotiate favourable agreements. This can lead to strained relationships and limited access to essential goods or services, further hindering business operations.

A recent study by Accounting Insight News [3] revealed that 30% of small businesses were forced to use reserved funds to chase overdue invoices instead.

Using reserved funds to chase overdue invoices means businesses are tapping into their emergency or contingency funds. These funds are typically intended for unexpected expenses or as a safety net during challenging times. By depleting these reserves to cover the shortfall caused by late payments, businesses are left vulnerable and exposed to financial risks.

Back to the top

4. Destroy relationships and commitments with suppliers

Consistently facing challenges with late payments from customers can have far-reaching consequences for a company. Beyond the immediate financial impact of not being able to pay suppliers on time, it can significantly damage the relationships between the company and its suppliers.

Late payments create a sense of uncertainty and frustration for suppliers, as they rely on timely payments to manage their own operations and maintain cash flow. When a company fails to meet its payment obligations, suppliers may question the company's reliability and ability to fulfil its commitments. This doubt can erode the trust and confidence that suppliers have in the company, straining the supplier-customer relationship.

As a result, suppliers may become hesitant to extend favourable terms or prioritise the company's orders, potentially impacting the company's ability to access necessary goods or services. Moreover, suppliers may reconsider future collaborations or partnerships with the company, opting for more reliable and consistent business relationships. This can limit the company's options for sourcing quality products or services and hinder its growth opportunities.

Furthermore, the negative impact extends beyond immediate business relationships. Word spreads quickly in the industry, and a company known for consistently struggling with late payments may develop a reputation for being unreliable or untrustworthy. This tarnished reputation can make it increasingly challenging to establish trust with potential business partners, impacting the company's ability to forge new collaborations and expand its network.

Back to the top

How SaaS accounting solutions can provide powerful accounts receivable management and minimise overdue payment

Effectively managing accounts receivable and maintaining a steady cash flow is a huge challenge. Fortunately, with breakthroughs in technology, software as a service (SaaS) accounting software has emerged and transformed how businesses handle their financial processes by streamlining accounts receivable management and minimising the occurrence of overdue payments.

Credit check assistance: SaaS accounting solutions enable businesses to conduct thorough credit checks on potential clients. By assessing their credit history and financial standing, businesses can identify any risks associated with late payments or defaults. This information helps make informed decisions about partnerships and create mitigation plans for non-payment scenarios.
Cash flow forecasting: Reliable cash flow predictions are crucial for financial stability. SaaS accounting software with accounts receivable automation allows businesses to collect payments quickly, improving cash flow. Real-time data and comprehensive reporting provide more accurate collection patterns, enhancing cash flow forecasting capabilities.
Consistent and timely payments: SaaS accounting solutions facilitate the automatic sending of invoices, reducing Days Sales Outstanding (DSO) and bad debt write-offs. Automated accounts receivable features send proactive payment reminders and dunning notices, ensuring payment remains a priority for customers. Customisation options simplify invoice validation for customers, enhancing the overall payment experience.
Enhanced customer experience: SaaS accounting solutions offer automatic billing features that improve customer satisfaction and retention rates. Flexible payment methods, invoice reminders, and real-time payment status updates minimise payment disputes and expedite receivables collection. Customer segmentation and contextual messaging enable businesses to proactively engage with customers, reducing the risk of customer churn throughout the order-to-cash cycle.
Strengthened accounts receivable: By leveraging SaaS solutions, businesses can streamline their invoicing processes, track payments in real-time, and enhance overall cash flow management. This agility in financial operations helps organisations stay competitive in a dynamic business landscape, freeing up resources previously tied to manual receivables management.

Back to the top

Having a strong cash flow is essential for any business to thrive and remain competitive. By embracing SaaS solutions, businesses can create a more agile and efficient financial department, eliminating the tedious manual management of receivables. This allows for a streamlined invoicing process, real-time payment tracking, and an overall improvement in cash flow. With these capabilities, businesses will thrive in a highly competitive business landscape.

But hold on, what exactly is SaaS accounting software? Is it the right fit for your business? Discover all the answers and more in our comprehensive whitepaper. Don't miss out, click below to download it today!