Often businesses increase sales by liberalizing their AR policy which leads to overgrown Accounts Receivable that are harder to collect. The longer one waits for Accounts Receivable harder it is to convert it to cash. Over time these problems grow, pile up and cause cash flow problems.
As a remote accounting firm that has been working with small, medium and large businesses it is not common for us to observe cases where significant money gets trapped in the books, businesses are then forced to resort to financing which cost them a lot of interest further exacerbating the cash flow problems. By outsourcing their Accounts Receivable to Outsourced Bookkeeping, they finally were able to solve their cash problems but it did take us some time to do so.
The majority of businesses do not however solve their AR problems and head towards cash crunch and eventual derailment. This is exactly the reason why cash flow problems are the reason for the failure of 86% of the small and medium businesses. However, as an SMB one can quickly identify the hidden AR problems and solve them with outsourced accounts receivable. But how does one identify the AR problems? Read on to know the answer:
4 Signs That Indicate the Need for Outsourced Accounts Receivable:
Your DSO tends to be higher: An average number of days a business taken to receive the payment for the given credit to the customer is called Days Sales Outstanding (DSO). So higher DSO indicates that a business is taking a long time to receive the payment which can impede businesses from smoothly running their operations.
So having a higher DSO indicate that a business has a long list of unpaid credit which also diverts the attention of your resources and keeps them from identifying and solving the problems with AR overhauls. In the case of a few businesses, the DSO might fluctuate a lot which also is a sign of an inefficient AR process and an indication of an impending cash flow problem.
Accounts Receivable Turnover Rate is lower than the competition: Accounts Receivable Turnover Rate like DSO also measures the business’s ability to collect the receivables in time. It is calculated by dividing the net credit sales by the average accounts receivable (mean of receivable at starting and ending of the accounting period). A higher turnover rate indicates the businesses’ ability to quickly collect the receivables without long waiting times and vice versa for lower ART.
However, businesses must be diligent when assessing and comparing turnover rates. For example, a grocery store will always have higher ART as compared to a manufacturing business. So an ART will be a good indicator of AR performance only when one compares two businesses in a similar industry with identical working capital structures and payment terms. In such cases, lower ART is always a sure shot sign of Accounts Receivable Problems that need to be solved at the earliest.
Inefficient Accounts Receivable System that does not help solve your problems: While metrics do indicate the presence of a problem, most AR systems do not efficiently work an organization’s AR goals. The majority of businesses are far from updating their infrastructure and this is a complication waiting to happen when it comes to Accounts Receivable.
If your AR system is unable to quickly identify non-paying customers and high risk past due accounts or cannot provide estimated payment times and is taking more than an hour to generate reports, then you are only months or even days away from catching problems and developing cash flow problems.
You identified the problem but are unable to solve it: Few businesses do make use of the right KPIs to quickly identify the problems that are plaguing their accounts receivable. Longer payments, higher DSOs, Turnover rates, and ADD (Average Days Delinquent) are calculated and the right reasons are identified for the mediocre metrics. However, they might lack the right resources or sometimes infrastructure or even time, to quickly solve the problems. And this is an ideal to seek help from accounting firms that specialize in providing Accounts Receivable Services.
Outsourced Bookkeeping – Best Remote Accounting Firm for Outsourced Accounts Receivable Services:
Equipped with cutting-edge accounting infrastructure and a team of expert accountants, Outsourced Booking has been providing high–ROI Accounts Receivable Services for decades now. At Outsourced Bookkeeping our accountants work hand-in-glove with your staff to identify the problems and provide customized Accounts Receivable Services in-line with your current organisational goals. So if you are a business looking to get rid of your cash flow problems by improving your Accounts Receivable you can outsource your Accounts Receivable to us at: https://outsourcedbookeeping.com/