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Improving cash flow can be a challenge for businesses, but fixing the missing links can help you take out the stress and gain some financial breathing room. Without money on hand, you can’t make payroll, cover your bills, or pay your taxes. 

When we talk about cash flow, major focus should go to accounts receivable and accounts payable as these two areas can give serious blows to your working capital potential. It needed a proper focus and an action plan to be dealt by the business.

Accounts receivable

Accounts Receivable is the proceeds or payment which the company will receive from its customers who have purchased its goods or services on credit. Usually the credit period is short ranging from a few days to months or in some cases maybe a year.

So many small and medium businesses must always be wary of raising Accounts Receivable which can inevitably come to create cash flow problems. So if you are a business that is looking to improve your cash flow and optimize the working capital, the first step any business can take is to get rid of suboptimal Accounts Receivable practices that usually lead to mismanagement of Accounts Receivable.

Accounts Payable

When a company purchases goods on credit which needs to be paid back in a short period of time, it is known as Accounts Payable. It is treated as a liability and comes under the heading ‘current liabilities’. Accounts Payable is a short-term debt payment which needs to be paid to avoid default.

Main bad practices to avoid when managing cash flow

1. Adopting an inefficient customer credit approval process which ignores payment terms and conditions.
2. Lack of standard invoice/billing process such as price, units, purchase quantities, customer accounts to be some of the common areas where mistakes can happen.
3. Lacking a master database of customer data due to lack of updated information or misinformation is a most common Accounts Receivable problem. 

Good practices for optimal cash flow improvement

1. Study your cash flow patterns to identify trends and create a plan to best prepare for the future.
2. Maintain a cash flow forecast document or a visualization.
3. Businesses must set out clear and concise policies on credit approvals and extensions. Separation of duties between finance and sales personnel must be established.
4. Negotiate quick payment terms with other parties as suitable.
5. Reduce the risk of unpaid invoices by adding late payment fees. Be sure to clearly highlight the late payment penalty in the initial customer contract and again when you first invoice, explaining what the fee is and when it applies.
6. Check your accounts payable terms (cash outflows) and see how long you can wait on payment
7. Assess credit limits regularly and establish timelines for credit applications.
8. Review the credit approval process and make necessary tweaks based on the market conditions, and risk profiles. Consider options to grant credit approvals for limited time periods if necessary.
9. Automate the invoicing or billing process to reduce human errors and time costs.
10. Centralize all the data on one standard platform with all the customer information – addresses, payment information, purchase limits, payment terms, discounts, credit terms and more.
11. Cut unnecessary spending such as extra office space, unsold inventory, costly employee phone plans.
12. Consider leasing instead of buying to make smaller payments that don’t eat your cash reserves.

By creating a standard credit approval process, businesses can handpick the right clients to reduce Accounts Receivable problems by a mile. Having a standard customer master database helps Accounts Receivable resources to reduce errors and follow-up the client better to further improve the cash flow performance.

KLOUDAC Global

KLOUDAC Global is a dedicated expansion of KLOUDAC, a recognized accounting firm with branches in Dubai, London & Colombo with 15 years of service experience. KLOUDAC Global mainly focuses on back office accounting with a whole package of services such as Financial Consultancy, Business setup, Audit and assurance services, Taxation services, Recognized accounting software, and more.

The back office of a business represents any administrative or financial services that support a company to run on a daily basis to manage its operations.

What is back office accounting?

All companies need some form of financial management to support their normal business operations. Back office accounting is the financial management of a company that essentially works behind the scenes. The accounting tasks are the same as other companies which normally include accounts payable, accounts receivable, payroll, and inventory management as such. 

Like all accounting systems, back office accounting needs to have logical processes in place. This includes a process to capture specific information for financial management, activities in place to record transactions into ledgers, and a manner into which a company puts together financial reports. Without these processes in place, a company may wind up not knowing anything meaningful about its financial activities. Monthly reporting is often a goal for all accounting systems in a company.

Why should a business outsource back office accounting?

Companies may be able to outsource back office accounting to a third party in order to focus on their main business goals. Hiring accountants or bookkeepers on behalf of the company for basic back office accounting tasks can be a way forward and a one solved problem for small and medium scale business owners as they can focus on managing operations and creating shareholder value for their business.

Areas to consider when outsourcing back office accounting

Your accounting tasks rob a major share of your time

Most of the time businesses end up having so much to do with operations, sales and other front office activities with  so little time while they forget about managing the finances right.

You encounter delays in accounting

When the entire accounting work is dependent on a specific group of resources, then there is a high chance of encountering delays.

You face consistent accounting errors and mistakes

Overworked resources, multiple roles and responsibilities and lack of solid segregation of duties are common causes of consistent mistakes in accounting and bookkeeping.

You run into frequent audit problems

More often than not small and medium businesses do not completely leverage the available tax breaks and opportunities due to lack of time, expertise or both, which is understandable. However, if your business is facing problems with right tax documentation for an IRS audit, then it is a sign of problem and also an area of improvement.

You are scaling your business

Simplest sign of potential accounting errors or problems is a business that is scaling. It is a relentless hassle that requires more focus and preparation for the volume of work it demands. Accounting tasks are sure to pile up and without adequate resources, a business may not reach its full potential and worse, may screech to a halt.

Outsourcing accounting services as a whole or seeking assistance for specific accounting services surely free up time, resources and help the business focus more on growth. So if you are a business that is encountering any of the signs above then it is high time to hire an expert remote accounting firm like Back Office Accountants.

How to outsource back office accounting?

When a small or medium business cannot continue its accounting in house, an option may be to outsource back office accounting practices to a third party. Hiring a local bookkeeping company can fulfill this service. Larger organizations may be able to outsource accounting services to international companies. This is not only inexpensive, but it also removes the need for maintaining offices in its main location. Outsourcing needs to be significantly cheaper than hiring and maintaining accounting staff in the local area.

KLOUDAC Global

KLOUDAC Global is a dedicated expansion of KLOUDAC, a recognized accounting firm with branches in Dubai, London & Colombo with 15 years of service experience. KLOUDAC Global mainly focuses on back office accounting with a whole package of services such as Financial Consultancy, Business setup, Audit and assurance services, Taxation services, Recognized accounting software, and more.