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How AR Automation Improves Cash Flow Management

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Managing cash flow is a critical aspect of any business's financial health. A company's ability to pay its bills, invest in growth, and weather financial challenges largely depends on its cash flow. One powerful tool that can significantly enhance cash flow management is Accounts Receivable (AR) automation. In this blog, we’ll explore how AR automation improves cash flow management and why it has become an essential component to doing business today–especially for small to midsize B2B companies.

The Importance of Cash Flow Management

Before we delve into the benefits of AR automation, it's important to understand the significance of effective cash flow management. Cash flow refers to the movement of money into and out of a business over a specific period. It includes all the funds received from customers, payments made to suppliers, operating expenses, debt servicing, and any other financial activities within the company.

Managing cash flow effectively is crucial for several reasons:

  • Solvency: Adequate cash flow ensures that a business can meet its short-term and long-term financial obligations, preventing bankruptcy or insolvency.

  • Growth and Investment: Positive cash flow provides the financial flexibility to invest in new opportunities, expand operations, and take advantage of growth potential.

  • Operational Stability: Maintaining consistent cash flow allows a company to run its day-to-day operations smoothly without interruptions.

  • Stress Reduction: Effective cash flow management reduces the stress and uncertainty associated with financial crises, enabling business owners to focus on strategic decisions rather than firefighting.

  • Creditworthiness: Reliable cash flow enhances a company's creditworthiness, making it easier to secure loans or credit when needed.

Challenges in Cash Flow Management

Cash flow management can be challenging due to various factors, some less controllable than others. When customers are late on their payments or stretch payment terms, it can cause a major disruption to a company’s cash flow. Then there are seasonal fluctuations (which can be anticipated but still present gaps in cash flow) and economic uncertainty due to external factors like economic downturns or unexpected events which are additional hurdles finance teams must deal with. 

Other challenges in cash management include the inefficiencies brought on by the use of manual AR processes, including invoice generation, payment tracking and reconciliation. These tasks, when performed manually, are prone to errors which results in even more delays and increased administrative costs. And finally, a lack of real-time visibility into financial data can make it difficult for finance professionals to make informed decisions and predictions about future cash flow. Fortunately, these last challenges can easily be mitigated with the addition of technology.

AR Automation: A Solution for Improved Cash Flow Management

Accounts Receivable automation involves the use of technology to streamline and optimize the processes related to invoicing, payment collection, and AR management. By automating these tasks, businesses can overcome many of the challenges associated with cash flow management. Here are some ways AR automation improves cash flow:

  1. Faster Invoicing and Payment Collection

AR automation accelerates the invoicing process by generating invoices automatically and delivering them to customers electronically (or other methods of their choice). This eliminates the need to create invoices manually, reducing the likelihood of errors and delays. Automated invoicing also allows for immediate delivery, which can prompt customers to pay more quickly.

Moreover, AR automation often includes online payment options, making it easier for customers to settle their bills promptly. This can significantly reduce the average time it takes to collect payments and boost cash flow.

  1. Improved Accuracy and Reduced Errors

Manual AR processes are prone to human errors, which can lead to discrepancies in invoicing and payment tracking. AR automation eliminates these errors by relying on predefined templates, established workflows and direct capture of financial data. Automated systems perform calculations accurately and record transactions consistently, reducing the risk of discrepancies and disputes with customers.

  1. Streamlined Payment Reconciliation

Reconciling payments with outstanding invoices can be a time-consuming task, especially when you have many customers. AR automation simplifies this process by automatically matching received payments to corresponding invoices. It can also identify any discrepancies or missing payments, allowing finance teams to address issues promptly.

  1. Real-time Visibility and Reporting

One of the significant advantages of AR automation is the real-time visibility it provides into a company's financial health. Businesses can access up-to-the-minute data on their accounts receivable, enabling them to make informed decisions about cash flow management. This visibility allows companies to identify trends, spot potential issues early, and adjust their strategies accordingly.

  1. Credit Risk Assessment

AR automation solutions often include features for assessing customer credit risk. These tools can help businesses make informed decisions about extending credit to customers. By avoiding high-risk customers or setting appropriate credit limits, a company can reduce the likelihood of unpaid invoices and the associated negative impact on cash flow.

  1. Customer Self-Service

Many AR automation systems offer customer portals, allowing clients to view and manage their invoices and payments independently. This self-service capability not only improves customer satisfaction but also expedites the payment process. When customers can access their accounts and make payments at their convenience, it can lead to quicker settlements.

  1. Automatic Payment Reminders

AR automation software can be programmed to send automated payment reminders to customers when their invoices are approaching the due date or have become overdue. These reminders serve as gentle nudges to encourage timely payments, reducing the number of delinquent accounts.

  1. Enhanced Security

AR automation solutions often come with robust security features, protecting sensitive financial data. With secure data handling and storage, businesses can ensure that their financial information remains confidential and protected from cyber threats, preventing potential financial losses.

  1. Scalability

AR automation solutions are scalable and can adapt to a company's growth. No matter what size business you are, these systems can accommodate your needs, ensuring that your cash flow management remains efficient as your business expands.

  1. Cost Savings

Though there may be an initial investment in implementing AR automation, the long-term cost savings can be significant. Automation reduces the need for manual labor and minimizes the risk of costly errors. Over time, the return on investment becomes evident through improved cash flow and operational efficiency.

Before and After Look with AR Automation

Let’s take a look at how an accounts receivable department in a mid-sized company functioned before implementing AR automation software. First, because of a surge in business–a good thing, of course–the small team fell behind in their invoicing, taking days to get invoices out. As payments trickled in, the team again had difficulty keeping up with the workload as they tried to track payments and match them to invoices. And to complicate things, there were more than the usual amount of errors because of the stress and strain of trying to work at lightning pace. 

The result was inconsistent cash flow due to delayed payments and too many customer disputes over billing errors which took up valuable time that could have been used on more important tasks.

The After scenario looks like this: Invoices were generated automatically, drastically reducing the time needed to create and send them. Because correct invoices were sent immediately and customers could easily make payments in a self-serve portal, collections were accelerated. Those improvements led to a significant increase in cash flow, with more predictable and consistent revenue. And disputes related to billing errors virtually disappeared due to accurate automated invoicing.

The transformation that AR automation–faster payments, reduced errors and improved financial stability–can bring to a business's cash flow management is easily achievable. Read this case study to see how an LED lighting company cut DSO by 30% and automated collections across hundreds of customers. 

Choosing the Right AR Automation Solution

Selecting the right AR automation solution is a critical step in reaping the benefits of improved cash flow management. Here are some factors to consider when choosing the right solution for your business:

  • Scalability: Ensure that the solution can accommodate your current business size and future growth.

  • Integration: Verify that the AR automation software can seamlessly integrate with your existing accounting and financial systems.

  • Customization: Look for software that can be tailored to your specific industry and business needs.

  • User-friendliness: A user-friendly interface is essential to ensure that your team can make the most of the software without extensive.

There are plenty of choices in the marketplace. But if you’re a small to midsize business, take a look at Payference, an all-in-one AI-powered cash management platform. It was built for businesses like yours that want all the functionality that enterprise level businesses have access to without any of the unnecessary features you don’t need (or want to pay for.) Set up your own personal demo with a click.