BUSINESS FINANCE LESSON2

• Accounts receivable - represents money owed by a customer to a business for goods or services purchased on credit.
• Effective accounts receivable management - crucial to ensure timely payments and maintain healthy cash flow
• Examples of Accounts Receivable

  • Unpaid invoices for products purchased on credit in a store.

  • Outstanding payments for services rendered, like consulting fees or repairs.

  • Balances on customer accounts for credit extended, such as phone bills or credit card statements.
• ⊳ Receivable management or accounts receivable management is the strategic process of ensuring customers make timely payments.
• Receivable management - It is paramount in maintaining a healthy working capital for businesses and preventing overdue or unpaid customer invoices.
• OBJECTIVES OF RECEIVABLE MANAGEMENT

  Maximize Cash Flow

  Reduce Days Sales Outstanding

  Minimize Bad Debt

  Optimize Working Capital

  Maintain Positive Customer Relationships
• 10 STEPS TO RECEIVABLE

  MANAGEMENT

  Establish Credit Practices

  Issue Invoices

  Track Accounts Receivable

  Process Payments

  Reconcile Accounts

  Manage Collections

  Generate Reports and Analyze Data

  Customer Relationship Management

  Compliance and Legal Considerations

  Continuous Improvement
• Maximize Cash Flow - The primary goal is to minimize the lag between providing goods/services and receiving payment.
• Reduce Days Sales Outstanding (DSO): DSO measures the average time customers pay their invoices. Lower DSO translates to faster cash inflow and improved financial stability.
• Minimize Bad Debt - Unpaid invoices become bad debt, impacting your bottom line.
• Optimize Working Capital - By accelerating cash collection, you free up working capital for investments, expansions, or covering operational expenses

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• Maintain Positive Customer Relationships - While collecting payments is critical, good receivables management prioritizes open communication and customer understanding.
• Establish Credit Practices

  • Set credit limits: Determine the maximum amount of credit you're willing to extend to each customer based on their creditworthiness.

  • Conduct credit checks: Verify customer credit history to assess their ability to pay.

  • Communicate terms clearly: Ensure customers understand payment terms and deadlines
• Issue Invoices

  • Create accurate invoices: Include customer information, product/service descriptions, quantities, prices, payment terms, and due dates.

  • Send invoices promptly: Deliver invoices to customers promptly, either electronically or through physical mail
• Track Accounts Receivable:

  • Monitor outstanding invoices: Record payments and track invoices that remain unpaid.

  • Send reminders and follow-ups: Gently remind customers of upcoming or overdue payments, encouraging prompt settlement
• Process Payments

  • Receive payments: Collect payments via various methods (e.g., checks, credit cards, bank transfers, online payments).

  • Record payments accurately: Update accounts receivable records to reflect received payments.
• Reconcile Accounts:

  • Compare records: Regularly verify that your accounts receivable records match your bank statements.

  • Resolve discrepancies: Investigate and address any differences to ensure financial accuracy.
• Manage Collections:

  • Follow-up on overdue accounts: Contact customers with past-due invoices to initiate payment arrangements.

  • Consider collection actions: If necessary, escalate collection efforts to recover outstanding debt
• Generate Reports and Analyze Data:

  • Produce reports: Track critical metrics like receivables ageing, average collection period, and bad debt percentage.

  • Identify trends and insights: Use data to evaluate the effectiveness of your receivables management process and identify areas for improvement
• Customer Relationship Management:

  Effective CRM involves two major stages –

  1. Open Communication:

  • Proactive Outreach: Regularly update customers on

  their account status via email, text, or phone calls.

  • Multiple Channels: Provide various communication options for customer preferences (e.g., online portal, email, phone).
• Customer Relationship Management:

  Effective CRM involves two major stages –

  1. Open Communication:

  • Personalized Interactions: Address customers by name

  and actively listen to their concerns.

  • Transparency and Clear Explanations: Be transparent about late fees, payment options, and collection procedures.
• Customer Relationship Management:

  Effective CRM involves two major stages –

  2. Addressing Inquiries and Concerns:

  • Timely Response: Aim to respond to customer inquiries

  within 24 hours or less.

  • Empathetic and Solution-Oriented Approach: Acknowledge customer frustration and proactively offer solutions.
• Customer Relationship Management:

  Effective CRM involves two major stages –

  2. Addressing Inquiries and Concerns:

  • Document Interactions: Keep track of all

  communication records for future reference.

  • Escalation Process: Establish a straightforward process for escalating unresolved issues to relevant individuals
• Compliance and Legal Considerations

  1. Accounting Standards

  • Accurate Recordkeeping: Maintain accurate and up-to-date

  records of all invoices, payments, and ageing receivables.

  • Internal Controls: Implement internal controls to prevent fraud and errors.

  • Reporting: Generate accurate and timely reports for stakeholders and financial audits.
• Compliance and Legal Considerations

  2. Legal Regulations

  • Fair Debt Collection Practices Act (FDCPA): Understand and

  comply with regulations regarding contacting debtors.

  • State-Specific Laws: Be aware of additional regulations specific to your location.

  • Ethical Collections Practices: Avoid deceptive or harassing tactics when collecting debts.
• Continuous Improvement

  • Regular Process Review: Schedule periodic reviews of the receivables management process to identify areas for improvement.

  • Performance Metrics: Track critical metrics like Days Sales Outstanding (DSO), average collection period, and bad debt percentage.
• 10 steps

  Continuous Improvement

  • Benchmarking: Compare your performance to industry averages and best practices.

  • Technology Adoption: Utilize tools like automated invoicing, online payment portals, and data analytics to streamline processes and gain insights