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Is your service-based business experiencing inconsistent cash flow that is hard to forecast? Your accounts receivable days might be to blame. Whether you don’t yet have payment terms or aren’t consistently following up on unpaid invoices, not receiving cash on time can cause unwanted side effects.
If you’d like to learn how to adjust your accounts receivable days to accelerate your cash flow, keep reading.
Improve Payment Terms
If you're having trouble building up your cash reserve, a good first step is to adjust your payment terms. By speeding up the payment process—without changing your pricing or adding more services—you can improve your cash flow. We suggest reducing your accounts receivable (AR) days from 60 to 15 or 30. This helps make your cash flow more predictable, so you won’t need to rely on your line of credit when funds are tight. The graphic below shows an example of a company that avoided tapping into their line of credit in March by reducing AR days to 15.
Collecting payments on time is key to maintaining steady cash flow. We recommend building a good relationship with your client’s AP clerk and making sure they have all the details they need to process payments smoothly. Clients are more likely to pay promptly when they know payment deadlines are monitored and overdue payments are followed up on. Plus, businesses tend to pay on time when they’ve established strong connections with key contacts at your company.
AR Policies
It's a good idea to establish an accounts receivable (AR) policy and clearly communicate it to clients from the start. For instance, you could let clients know that invoices are due within 15 days of issuance, and that services may be paused if payments are not received on time. While setting this policy is important, consistently enforcing it is key. We recommend maintaining these terms without exceptions.
While strict payment terms may seem daunting, they are essential for maintaining steady cash flow for your business. If you're interested in learning more about ways we help our clients pursue steady cash flow, sign up for a free virtual CFO consultation.
