Financial Health Check: Assess Your Business Finances 

Why Accounts Receivable is Crucial to Cashflow

September 26, 2022

Accounts receivable is simply an aspect of good financial management – when accounts receivable is neglected due to budgetary reasons, staff shortages, or lack of experience – and every other reason – your business will see the negative impact on your cash flow and lack the understanding of your inflows and outflows to identify where something is going wrong. Essentially, it delivers a hit to your cashflow.

If you would like to learn more about why  you need an AR (Accounts Receivable) Department, check out this resource here. 

Accounts Receivable and Your Cashflow

Accounts receivable manages the incoming and expected payments from your customers or clients. When your accounts receivable is not functioning properly, invoices get lost or forgotten, payments are delayed, reminders are sent too late, etc. When you have a AR department that is highly organized and on top of your finances, invoices are delivered and typically paid in a timely manner – and in situations where customers and clients are late, there is proper communication covering late fees, payment arrangements, and expectations.

AR goes beyond invoicing, it also covers credit risk management, collections, cash reconciliation, and deductions management. All of which play a large role in maintaining a steady and expected cashflow in your business.

Consequences of Poor AR and Your Cashflow

Poor management of your Accounts Receivable can lead to many issues in your business and in your cashflow. In addition to poor communication and reputation with your customers and clients, other issues can include:

  • A billing hiatus, when many invoices are forgotten or delayed in the delivery process
  • Late or unpaid invoices
  • Periods of slow or no positive cashflow
  • Financing of other’s debts
  • Increased use of credit to cover expenses
  • Unorganized system leading to unpredictable cashflow expectations

Other issues may arise, some are easy fixes such as sending out invoices promptly, but others can be costly and time consuming leading to larger cashflow issues as time passes.

How to Ensure Your AR Department is Properly Maintaining Your Cashflow

No matter what issues may arise when your AR department is unorganized or scattered, an AR department that is up to date in your finances and ensures that everything is running smoothly is ideal. Ensuring your AR department is readily equipped to handle these situations, or avoid them altogether, means you must choose what is best for your business. 

AR departments can exist as a singular person who handles multiple aspects of your finance department, this is typical for smaller, self-sufficient businesses. You may also chose to hire an in-house or local team. Lastly, the option we recommend is hiring out to a virtual bookkeeping and accounting firm. Virtual firms and finance departments are highly adaptable, modifying themselves to match the ebb and flow of your business and what your business needs throughout the year. This allows your cashflow management to remain consistent whether you’re experiencing a huge growth or loss. 

If you’re ready to outsource your Accounts Receivable, contact ModVenturesLLC today.


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