Predictable cash flow and good working capital are essential for operating a successful business. Maximizing your cash on hand helps you mitigate risk and weather potential ups and downs in your business. Predictable cash flow also helps with managing your accounts payable in a more timely manner and being less reliant on loans or external funding to grow your business. Every accounting team should be focused on how to optimize and improve cash flow and maximize working capital.

What is cash flow?

Cash flow is the cold, hard cash that flows in and out of a business through accounts receivable and accounts payable.

What is working capital?

Working capital measures a company’s short-term financial standing and health. To calculate working capital, you subtract a company’s current liabilities from its assets.

Our recent blog Is Accounts Receivable an Asset? What You Need to Know explains assets as anything your company owns or controls directly that is worth a value or could produce value. Liabilities are sums that a company owes or will have to pay out.

What are accounts receivable terms?

Accounts receivable terms, otherwise known as AR terms or payment terms, is the designated time frame a customer has to pay a bill. Accounts receivable terms are typically agreed upon in a contract or are provided on the invoice.

Your customers may attempt to negotiate payment terms when they initiate doing business with you. It’s important to ensure the payment terms are helping and not hurting your potential cash flow.

Introduce shorter net payment terms

Common payment terms include N-30 (payment due in 30 days), N-60 (payment due in 60 days), and so on. The shorter of a time frame you’re able to make your accounts receivable terms, the better your cash flow will be. We recommend aiming for N-30 wherever possible. You want to aim to have cash on hand as long as possible.

Your customers will want to keep their payment terms longer to improve their working capital. This is counterintuitive to your business goals because you’ll want to make payment terms as reasonably short as possible to improve your own working capital and cash flow.

There’s a balance to be had here. You don’t want to potentially lose out on winning business because you’re payment terms are too short. Make sure to negotiate this fairly to keep customer relationships in good standing.

A good way to help customers maintain their working capital and cash flow while keeping shorter net terms is by letting them pay by credit card as their payment method. This way they are still in control of when their cash actually leaves their bank account.

Consider cash on delivery (COD) for historically late payers

Cash on delivery (COD) isn’t the best payment term in most cases. However, if you’re working with customers that have a history of paying late, you may want to switch them to cash on delivery payments. This means that they have to remit payment when they receive their order.

Cash on delivery has its downsides, though. It can be labour-intensive to process offline payments like cash and cheques. It also means you can’t take advantage of accounts receivable automation like automated pull payments.

Offer an incentive for paying early

Outside of shortening your accounts receivable terms, you can employ other incentives to encourage customers to pay early. Offering a small discount on the invoice if they pay by N-7 or N-15 could really help you improve your overall cash flow.

Learn how Gladstone Brewing Co. now has a transparent view in to its upcoming cash flow thanks to accounts receivable automation.