Finance & Accounting

What are the Best Practices for Working Capital Optimization of Accounts Receivable?

calendar26 Mar, 2021
timeReading Time: 4 Minutes
Working Capital Optimization of Accounts Receivable

Regardless of the business structure, it is essential to have a productive accounts receivable strategy in place to optimize cash flow. No business can carry its operations until it has optimal Working capital , and this is only feasible when the accounts receivable process is twisted as per the company’s situation.

However, various entrepreneurs and business owners overlook its significance entirely & put in little effort to accumulate payments from multiple sources. One of the significant errors made by most of the owners is in the form of an unplanned approach towards the AR process, resulting in unhappy clients & delayed payments and the minimal use of the working capital.

What Makes Optimization of Accounts Receivable Vital? 

The advantages of streamlining the AR process may take ample time to come into existence, but many other attributes gain promptly. This can be witnessed in the form of increased liquidity by safeguarding existing capital from potential wastage. In addition to that, the business can operate more seamlessly with increased capital and reduced debt in hand.

When it comes to streamlining AR processes, you need to get started as soon as possible without incurring any delay. This includes sharing payment policies with the client during the initial stage itself. A productive approach toward this can be taken by establishing an electronic payment mode for a new client coming in.

What are the Possible Hindrances Related to AR in Working Capital?

Ordinary Account Receivable practices create countless loopholes for businesses, including extending credit to clients who are already on the payment defaulter list, ignoring the accuracy of invoices and bills, generating and leveraging financial reports, and more. Also, contributing more time to resolve false invoices and paying less attention to the core areas such as accounting and finance team making them unproductive over time. 

This adversely affects the overall efficacy of the cash flow management and result in compromised working capital. All these loopholes are fused as a result of a business’s failure to leverage the latest technology because of the following: 

  • Isolated processes and operations across the front, back-office, and middle. 
  • Lack of coordination with sales and credit teams. 
  • Negligible access to workflow, ongoing issues, collected data
  • Increasing bad-debt and unclear dues
  • Inefficient record systems like billing systems, ERPs, & programs for customer relationship management. 
  • Non-legitimate billing created from the decentralized, manual, & non-optimized process. 
  • Maximum number resolved small-balance transactions. 

Read our article:Account Receivable & Payable Process in Cash Flow Management

What are the Best Tips to Improve Account Receivable & Working Capital? 

Streamlining your AR process may seem like a cumbersome task at first, but it can be done with ease by leveraging the following given strategies, along with improving the overall performance of the business:-

Best Tips to Improve Account Receivable & Working Capital

Precise Management of Customer Data

To setup & maintain a productive AR process, it is imperative to centralize the primary data process to ensure that the customer accounts and information are accurate. For example, when the addresses of the customer are invalid, it results in delivering the invoice to a faulty address, making the collection process more complicated. 

It is essential to deeply examine the customer’s account periodically to identify anomalies such as unusual terms of payments, credit limits, and discounts. Any alternation made to the customer data should be backed by a document for future reference. The firm should pay attention to setting up an effective control to minimize the occurrence of data manipulation.

Inculcate Customer-Friendly Approval Process  

Often, it is seen that businesses form an unproductive credit protocol for the sake of increasing sales, leading to compromised cash flow management. Extending credit is not bad for the business unless it does not impact the company’s working capital or cash flow[1] management. The firm must leverage a definite process for approval for extending the credit. 

The process should reflect the entire workflow of the application process, the condition under which an account is put to hold, along guidelines related to the evaluation and overriding of credit limits. Also, to ensure that the credit approval process is in action, the consistent audit must be done to identify the pain points. 

Incorporate Efficient Billing Process

Every company’s billing process creates a roadmap for either productive or inefficient invoice management. The invoice process must be optimized for higher accuracy as any error can have a long-lasting impact on the overall productivity & profitability. Also, it is imperative to deliver an invoice in a timely manner, along with defining the method they are created.

To serve such a purpose, leverage the latest gen technology to digitize the invoice process is one of the best solutions. Accounts with errors should be pointed out with a report highlighting the root cause for efficient dealing. 

Refined the Cash Application Process

When payments finally reached the company, they must be attached to the legitimate invoices and the valid customer. This is imperative to address future conflicts. Also, payment should be applied timely to classify the current & past accounts. 

The cash application process can be streamlined easily with minimal complications by providing clients with confined payment alternatives. The journal entries must be recorded accordingly & beforehand w.r.t cut-offs dates. Routing the cash amount to the suspense accounts must be avoided until you pinpoint the exact solution for the problem. 

Mitigate Inefficiencies from the Collection Process

To ensure seamless cash flow management, it is imperative to optimize the AR process as per the existing conditions. A proactive approach must be adopted to aid the collection efforts.

On the other hand, setting up a production process to negotiate payment plans is essential to ensure compliance with the company’s objective. Also, to reduce the manual entry loopholes, one must leverage the latest technology for automating the whole process. 


Any firm can improve its working capital by converting its current assets into liquidity in a timely manner. For example, if a firm can efficiently oversee its accounts receivable and inventory, it can increase cash flow and improved working capital. Likewise, if a firm can setup supplier-friendly credit terms with its vendors, the firms will have the advantage of having an increased working capital. 

Read our article:Accounts Receivable: Definition and Tips to Manage

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