Does tracking customer payments, managing overdue sales invoices, or forecasting cash inflows feel overwhelming as a small business owner or within your accounts receivable (AR) department?
Are you stressed about whether your customers will pay on time, leaving you uncertain about whether you’ll have the working capital to cover your operating expenses such as salaries, PAYE/NI, VAT, and supplier payments?
If so, you’re in the right place.
In just five minutes, I’ll explain how automating and streamlining your accounts receivable processes can boost cash flow, shorten your Days Sales Outstanding (DSO), and free up working capital quickly.
I’m Shishir Khadka, a chartered certified accountant (ACCA) and cash flow specialist with over two decades of experience helping businesses optimize their cash flow through efficient AR management.
Why should you trust my expertise in optimizing accounts receivable?
My insights into cash flow management have been featured in The Independent, where I’ve shared strategies to enhance financial management and improve cash inflows. I’ve also contributed thought leadership to platforms like Zoho, Agicap and Floatapp, helping small business owners streamline their AR workflows using automation tools. As the founder of Hungry Cash Flow software and Cashflowpedia, the world’s most comprehensive cash flow resource, I’m committed to offering practical, results-driven solutions to optimize your AR process and improve your cash flow fast.
Leveraging My Proven Internal Records on Accounts Receivable
In my experience since 2003, many small business owners underestimate the impact of optimizing their accounts receivable on overall financial health. According to my internal records, after reviewing 927 small business cash flow issues over 20 years across industries like retail, dental, and marketing agencies, streamlining accounts receivable processes can improve cash flow by an average of 19.25%. This is achieved by automating invoicing, implementing structured follow-ups, and setting clear payment terms that incentivize early payments.
Key Takeaways
By the end of this article, I will show you how to:
- Automate your AR processes to save time and reduce errors.
- Boost your cash flow by shortening Days Sales Outstanding (DSO).
- Implement best practices to improve collections and ensure timely payments.
- Use AR metrics and KPIs like DSO and AR turnover ratio to strengthen your financial stability.
[QUIZ] TAKE MY AR PROCESS GAP ASSESSMENT QUIZ TO IMPROVE YOUR CASH FLOW
What Is Accounts Receivable (AR) , and What Is Its Role in Improving Cash Flow Fast?
What Is Accounts Receivable (AR), and What Is Its Role in Improving Cash Flow Quickly?
Accounts Receivable (AR) refers to unpaid invoices for goods or services that have been delivered but not yet paid for by customers. The role of AR is crucial in managing cash flow, as it directly affects your business’s ability to cover operational expenses and reinvest in growth. Efficient AR management ensures that payments owed to your business are collected promptly, speeding up cash inflows and maintaining healthy liquidity.
The role of AR in cash flow management can be broken down into two parts: short-term and long-term. In the short term, AR management helps businesses have enough cash to meet immediate financial obligations. In the long term, it supports sustainable cash inflows, enabling companies to reinvest in growth and expansion.
How Delayed Payments Impact Short-Term Liquidity in Business
Short-term liquidity refers to the cash available to cover immediate operational expenses such as salaries, supplier payments, and taxes (PAYE/NI, VAT, and pension contributions). AR management’s role in this context is vital to ensuring businesses maintain sufficient liquidity, especially when customer payments are delayed.
In my experience as a financial consultant, delayed customer payments often create strain, preventing businesses from covering their short-term liabilities. Effective debtor management is essential to maintaining liquidity and ensuring your business can meet its financial obligations without external funding.
For instance, a marketing agency in Southampton, UK, had a DSO (Days Sales Outstanding) of 57 days in early 2023, which caused financial stress and required the owner to borrow funds to cover salaries. After implementing a comprehensive credit control process, we reduced the DSO to 30 days, leading to a 23% increase in cash reserves. This allowed the business to meet its short-term obligations without external financing.
One of my other clients, who sells preowned handbags in Chelsea, London, could not improve DSO; therefore, they had to rely on short-term financing provider Iwoca to pay salaries and quarterly VAT on time regularly.
How Effective Accounts Receivable Management Drives Long-Term Success and Business Growth
Effective Accounts Receivable (AR) management plays a critical role in long-term business success by ensuring steady cash inflows, maintaining liquidity, and providing the financial stability needed for growth and expansion. Businesses can secure a stable financial position and reinvest in future opportunities by optimising AR turnover and consistently collecting timely payments.
One of my clients, Distilled Limited, founded by Will Critchlow and Duncan Morris in 2007, was experiencing rapid growth. I took responsibility for credit control, collecting £81,527 in one month. By ensuring these payments were collected before their due dates, the business could secure the funds needed to move to a larger office on Cannon Street, accommodate more team members, and close key SEO clients. This strategic move helped fuel the company’s continued growth, and the business has since been successfully sold.
Another client, Duncan Smith, a pre-owned handbag seller in Fulham, London, has been running his business since 2002. We increased his cash reserves by improving his AR turnover ratio, enabling him to cover three months of operating expenses. Over the next eight quarters, this enhanced cash flow allowed him to raise the necessary capital to open a new location in Portsmouth, boosting sales revenue from £2.3 million to £3.8 million.
How Automation in Accounts Receivable Processes Can Boost Your Cash Flow Quickly
Automating accounts receivable (AR) processes can significantly accelerate cash flow by reducing the time it takes to collect payments, minimizing human errors in invoicing, and providing real-time visibility into outstanding invoices. These improvements allow businesses to collect payments faster, maintain healthier liquidity, and avoid cash flow bottlenecks that can slow down operations.
As a CFO, I’ve witnessed firsthand how automating AR leads to quicker cash inflows by streamlining the invoicing process and automating follow-ups. This approach speeds up collections and reduces Days Sales Outstanding (DSO), a critical factor in improving cash flow visibility. With AR automation, businesses can track payment statuses in real time, allowing for better forecasting of working capital needs and more confident financial planning.
Automating Invoicing for Faster Payment Collection
Automated invoicing ensures invoices are sent immediately after service delivery, reducing delays and minimizing errors. Tools like QuickBooks and Xero automatically generate invoices with accurate details, facilitating faster payment initiation and maintaining consistent cash inflows. By automating the invoicing process, businesses can drastically reduce manual errors and increase the likelihood of timely payments.
Reducing Days Sales Outstanding (DSO) for Improved Liquidity
One of the primary benefits of automation in AR is its ability to reduce Days Sales Outstanding (DSO). Businesses can speed up collections and free up working capital by sending invoices promptly and automating follow-ups. Tools like Bill.com eliminate manual delays, allowing for faster processing and improved liquidity.
Based on my 20 years of experience, automation has helped businesses reduce DSO by up to 20% within 30 days.
Automating Payment Follow-Ups to Speed Up Collections
Automated follow-ups are a critical component of AR automation, ensuring customers are reminded of overdue payments without manual intervention. Systems like Xero and QuickBooks can send reminders regularly, reducing late payments and accelerating cash flow. By automating this process, businesses can reduce the number of overdue payments, thereby improving cash flow management.
6 Automation Tools for Streamlining AR Processes
You can leverage various automation tools to streamline your AR processes, including invoicing, payment tracking, and follow-ups. Here are six tools I highly recommend:
- QuickBooks: Automates invoicing, payment reminders, and follow-ups with real-time tracking of outstanding payments.
- Xero: Offers automated invoicing and payment tracking while providing clear visibility into AR status.
- Bill.com: Simplifies payment collections and automates follow-up reminders to speed up cash inflows.
- Zoho Books: Provides automated invoicing, payment reminders, and integrates with other financial software for seamless AR management.
- FreshBooks: Designed for small businesses, it automates invoicing and tracks payments while offering detailed AR reports.
- Chaser: Specializes in automating payment reminders and follow-ups, ensuring timely collections and reducing overdue payments.
Client Story: A Practical Example of AR Automation in Action
In 2015, I worked with a luxury sofa provider to automate posting sales invoices in QuickBooks. The client used Magento as their backend system to process sales orders. At that time, there was no direct integration between Magento and QuickBooks, so I collaborated with Magento developers to ensure that the sales invoices matched QuickBooks’ required fields. To bridge the gap, I utilized a third-party tool, Transaction Pro, which imported transactions from Excel into QuickBooks.
This automation allowed me to process over 1,000 orders daily, eliminating the need for manual input and saving the business an annual administrative salary of £35,000.
What Is the Accounts Receivable Process, and How Can It Be Optimized?
The Accounts Receivable (AR) process involves several crucial steps, from generating invoices to collecting payments and managing overdue accounts. Optimizing this process ensures faster cash inflows, healthier working capital, and greater efficiency in managing customer payments. Streamlining AR processes allows businesses to reduce payment delays and improve liquidity.
What are the Key Components of the Accounts Receivable Process
The AR process consists of the following key components:
- Invoicing: Accurate and timely generation of invoices is essential to avoid payment delays.
- Payment Terms: Establishing clear and enforceable terms that define when payments are due.
- Payment Collection: Efficiently tracking payments to ensure collections are made on time.
- Handling Overdue Payments: Managing and following up on overdue invoices to minimize outstanding balances.
Optimizing these components helps reduce delays, accelerate cash inflows, and maintain healthier working capital.
What Are The Steps to Optimize the AR Process (With a Step-by-Step Video Walkthrough)
To streamline the AR process and boost efficiency, follow these four steps. You can watch the video walkthrough for detailed instructions on how I use these steps with QuickBooks, which can be applied to other platforms like Xero, Zoho, FreeAgent, or FreshBooks:
- Automate Invoicing: Tools like QuickBooks or Xero can automate invoicing, ensuring that invoices are sent promptly and accurately.
- Set Clear Payment Terms: Define payment terms that encourage faster payments, such as offering discounts for early payment.
- Regular Follow-Ups: Automate payment reminders with tools like Bill.com to ensure overdue payments are followed up on without manual intervention.
- Use AR Ageing Reports: Implement aging reports to track overdue accounts and take action promptly.
Real-Life Example – How Optimization Improved AR Efficiency
In 2021, I worked with Claire Sheppard, the owner of a luxury handbag store in London, who faced payment delays due to inconsistent invoicing and a lack of structured follow-up processes. To address these challenges, we automated her invoicing system using QuickBooks and set clear 30-day payment terms, ensuring that invoices were sent promptly and payment deadlines were clearly communicated.
We also leveraged ageing reports to identify late payers and implemented automated follow-ups. As a result, Claire reduced overdue invoices by 40%. Within three months, this optimization freed up £15,452.67 in cash flow, significantly improving her business’s liquidity and boosting working capital.
How Strong Internal Controls Process and AR KPIs Safeguard Cash Flow
Strong internal controls and consistent monitoring of Accounts Receivable (AR) Key Performance Indicators (KPIs) such as Turnover Ratio and Days Sales Outstanding (DSO) are crucial for protecting and optimizing cash flow. Effective internal controls reduce the risk of fraud and errors, while KPI monitoring provides insights into payment collection efficiency. Both are essential for maintaining healthy liquidity and operational stability.
What are the Key Internal Controls for Protecting Cash Flow in the AR Process
Implementing internal controls in the AR process ensures secure and efficient cash collection, minimizing the risk of fraud, errors, and cash flow disruptions. Here are the key controls:
- Segregation of Duties: Splitting responsibilities for invoicing, approvals, and collections to prevent fraud and reduce errors.
- Multi-Level Approval Systems: Invoices and AR adjustments undergo multiple reviews, minimizing unauthorized changes.
- Automated Fraud Detection: Tools like QuickBooks enable fraud detection to identify unusual transactions.
- Regular Reconciliation: Routine reconciliation of AR data ensures that payments are correctly recorded and discrepancies are addressed early.
Client Story: The Importance of Internal Controls in Preventing Fraud
I worked as a CFO for a luxury sofa retailer based in London between 2008 and 2023. The retailer had multiple showrooms, and in 2022, a new showroom manager was appointed. Since some customers paid in cash, cash was deposited into the company’s bank account monthly. While reviewing the bank reconciliation in QuickBooks, I discovered unallocated receipts. When questioned, the showroom manager claimed the money had been banked.
However, the bank reconciliation revealed that the manager had used £10,575 in cash payments from four orders over 45 days. The business owner immediately intervened, confronted the manager, recovered the money, and terminated her employment.
This incident underscores the critical role that internal controls play in protecting a business’s finances.
Why is monitoring AR KPIs (Turnover ratio and DSO) Critical for cash flow success?
Tracking AR KPIs like the AR Turnover Ratio and Days Sales Outstanding (DSO) is critical for maintaining healthy cash flow. These metrics provide valuable insights into payment collection efficiency and can be optimized to boost liquidity and minimize reliance on short-term financing.
Accounts Receivable Turnover Ratio
The AR Turnover Ratio indicates how efficiently a business collects receivables. A higher ratio reflects faster collection and healthier cash flow, while a lower ratio suggests collection delays that could hinder liquidity.
- Formula: AR Turnover Ratio = Net Credit Sales / Average Accounts Receivable
- Actionable Insight: Monitoring this ratio allows businesses to identify potential collection issues and take corrective action to ensure sufficient cash flow.
Days Sales Outstanding (DSO)
DSO measures the average time it takes for a business to collect payment after a sale. Lower DSO reflects faster collection, which supports a healthy cash flow and reduces financial strain.
- Formula: DSO = (Accounts Receivable / Net Credit Sales) × Number of Days
- Actionable Insight: Reducing DSO can shorten the cash conversion cycle, ensuring businesses have access to liquid cash for operations and growth.
What Are the Best Practices for Streamlining Accounts Receivable to Boost Your Cash Flow?
There are several best practices for streamlining accounts receivable (AR) to boost your cash flow, including automating AR processes, optimizing payment terms, and leveraging AR aging reports.
Based on my experience working with clients across various sectors—from small businesses with £40,000 in revenue to enterprises reaching £53.8m annually—here are six proven strategies I recommend for Optimizing Accounts Receivable to Improve Liquidity.
| Best Practice | Description |
|---|---|
|
Automate Where Possible |
Streamline invoicing and follow-ups for quicker payments |
|
Optimize Payment Terms |
Encourage timely payments with clear incentives |
|
Leverage AR Aging Reports |
Prioritize overdue collections for faster cash inflows |
|
Reconcile Accounts Receivable Regularly |
Identify payment discrepancies and resolve them promptly |
|
Maintain Strong Customer Relationships |
Communicate effectively to resolve payment issues |
|
Prioritize Collections Strategically |
Focus on high-value and overdue accounts first |
Example: How a Retailer Improved Cash Flow by £53,259 Using AR Best Practices
One of my clients, a luxury sofa retailer in London, faced growing cash flow issues due to delayed collections and unorganized debtor management. As revenue grew from £800k to £4.7m, so did the complexity of managing aged debtor balances. Payments varied, with some customers paying 50%, 25%, or even 10% as deposits, especially at month-end, leading to inconsistent cash inflows and missed opportunities to stay on top of payments.
To address this, I implemented weekly debtor report reviews instead of monthly. This allowed the team to identify overdue payments sooner and ensure full payments before delivering furniture. Within two months, the business gained full control over its debtors, reducing bad debt from 7.5% to 3.25% and saving £53,259 annually. The improved cash flow also stabilized operations and reduced the need for short-term financing.
[QUIZ] TAKE MY AR PROCESS GAP ASSESSMENT QUIZ TO IMPROVE YOUR CASH FLOW
How Does Accounts Payable Contrast with Accounts Receivable, and Why Does It Matter?
Accounts Payable (AP) and Accounts Receivable (AR) are both essential to your cash flow management, but they work in opposite directions. AP focuses on managing cash outflows, ensuring timely payments to suppliers, while AR deals with cash inflows, ensuring you collect payments from customers promptly.
Balancing AP and AR is crucial for maintaining healthy liquidity. Efficient management of both ensures you can cover your expenses while optimizing incoming cash to support growth and stability.
For a deeper dive into managing AP to improve your cash flow, explore my full guide here
Expert Discussion: What Do Fellow Cash Flow Professionals Say About Accounts Receivable Optimization?
Fellow cash flow experts agree that automation, strategic payment terms, and monitoring AR metrics are key to improving cash flow.
“Automation accelerates invoicing and payments, reducing errors and speeding up the cash flow cycle.”
“Clear payment terms with incentives or penalties ensure timely payments and protect liquidity.”
Both experts highlight that tracking KPIs like Days Sales Outstanding (DSO) helps businesses make real-time adjustments to their AR processes for better cash flow.
Your Next Steps for Streamlining Accounts Receivable and Boosting Cash Flow
Taking action to streamline your Accounts Receivable (AR) processes is essential for improving cash flow and maintaining financial stability. Here are the next steps you can take to implement these strategies effectively.
Implement My Best Practices Checklist
Use my Best Practices Checklist to guide your AR optimization. It covers automation, payment terms, reconciliation, and collection prioritization to streamline your AR processes.
Assess Your AR Process Using My Quiz
Evaluate the efficiency of your current AR management by taking my AR Process Assessment Quiz. This quick quiz will highlight areas where you can improve to speed up collections and boost cash flow.
Book a Call with My Team
For personalized assistance in optimizing your AR processes, book a call with my team. We can provide tailored solutions to help you implement best practices and unlock immediate cash flow improvements.
