Jorge de Lara Novella
Vice President and General Manager for GCS
American Express Mexico and Latin America
Expert Contributor

How to Use Accounts Receivable to Accelerate Cash Flow

By Jorge de Lara | Thu, 04/15/2021 - 09:11

For all businesses and companies, regardless of size, getting paid sooner and pushing forward their accounts payable is crucial for them to have positive cash flow and working capital to manage and grow their business.

Business-to-business commerce often implies payment cycles that range from 30 to 180 days after a transaction is made. Such a cycle has been widely adopted, as shown by the 80 percent of Small and Medium Businesses (SMBs) that finance themselves through vendors, according to the Bank of Mexico. Many SMBs set up such periods to recover their investment and thus be able to pay for purchases or expenses related to growth initiatives, manufacturing or day-to-day operations.

While such a model can enable a dynamic market ecosystem, when paired with external factors, it can lead to limited cash flow. According to a study by consulting firm KPMG, 59 percent of companies said they had liquidity issues derived from social distancing measures that disrupted trade in goods and services.

A strained cash flow can lead to an inability for organizations to immediately meet financial obligations, which can, in turn, push them toward unnecessary debt, stymying their sustainability as a business.

Accelerating Your Accounts Receivable to Fund Operations and Growth

In recent years, financial institutions have developed alternatives, such as accounts receivable financing, and it has become an increasingly popular practice. The option for a business to find alternatives to collect its accounts receivable sooner (with a marginal cost) via partnering with a financial institution to help accelerate payments or sell them (factoring) to a third party in order to cope with immediate liquidity needs can become a viable path when facing overwhelming cash flow demands. 

Sale conditions naturally depend on risk evaluations, which consider debtor assessment, payment period and amount due to establish collection viability. This means a company would be presented with differing factoring terms for each of its clients, depending on the conditions of each account. Factoring is thus a case-by-case option and finance teams need to evaluate their needs and possibilities to determine if it represents a good option or not.

Managing Past-Due Payments

When looking into cash flow management as it relates to accounts receivable, past-due payments are a fundamental element to keep in mind. There is an unavoidable risk of accumulating past-due payments and, therefore, businesses should minimize this possibility by evaluating their clients to establish appropriate credit terms whenever viable.

If a company faces overdue accounts, it should seek to recover the majority of its investment through a collection department or through third parties that provide such services or even acquire the debt, all within the appropriate legal framework and always in an ethical manner.

Optimization and Technological Solutions

An appropriate management of accounts receivable is a fundamental factor in maintaining a healthy cash flow. This is where leveraging automated payment tools can become vital in order to optimize acquisitions and expenses and even past-due payments, helping companies maintain a positive cash flow and working capital as well as keeping good track of digitized records for accounting, reconciliation, fiscal and even treasury purposes.

Using tech solutions to manage payments will naturally reduce errors but it will also increase the visibility of accounts receivable and reduce delays in invoicing and delivery processes. Such automation opens up the ability to see real-time data on the status of each account, providing the tools needed to accurately evaluate the viability of the business itself, revealing the implications of each payment cycle and unveiling the balance needed not only to handle possible delays but to leverage payment periodicity.

Such data ultimately translates into clear management policies that can be used to promote transparency and improve efficiency when dealing with customers in relation to terms of credit, applicable interest, time frames, debt renegotiation conditions or other possible agreements.

Like many market realities, payment cycles can be a hinderance or an advantage, depending on how they are handled. Managing accounts serviceable can seem like a juggling act but the reality is that such dexterity can in large part be handled by technological tools that track each account, reducing error, while providing the data needed to evaluate default risk, ensure cash flow sustainability and inform the viability of exploring options like accounts receivable financing or factoring if necessary.

Having the right visibility and control of the flow of such transactions can help small businesses successfully navigate through volatile times and build a more resilient, more profitable and ultimately a long-term sustainable business.

Photo by:   Jorge de Lara