Commercial Insights

Optimizing receivables and payables: A strategic approach to cash flow management

Learn how working with your banking team can help you make the most of your working capital

In any business, effective cash flow management is key to maintaining financial health and driving sustainable growth. Two essential components of cash flow management are accounts receivable (AR) and accounts payable (AP). Optimizing your cash conversion cycle by actively managing accounts payable and receivable offers one of the most powerful means of improving cash flow and profitability. Ensuring a steady cash inflow and outflow allows companies to meet financial obligations, invest in opportunities, and build resilience. Because of the rapidly evolving economic environment, it’s increasingly crucial to manage your cash flow.

Time and again, we’ve seen the advantages of optimizing working capital grow over time, leading to significant positive outcomes. For example, a company the Regions Treasury Management team worked with had a significant discovery: Their receivables had slowed by 10 days year over year. The business owner initially attributed this change to the economy, as their receivable contracts had increased to 60 days net pay.

After a comprehensive working capital analysis, Regions Treasury Manager banker recommended converting checks to virtual Commercial Card payments. This change not only saved the business an average of $2.13 a check (a roughly $500 a month savings) but also improved the working capital optimization cycle by providing quicker access to funds while reducing check fraud risk.

Here’s a checklist you can use to evaluate whether your company has room to improve on its payables and receivables.

How well are you managing your accounts payable?

1. Are payment terms actively negotiated with suppliers?
2. Are leaders in your organization aware of the importance and impact of working capital?
3. Is accounts payable performance monitored, with regular reports?
4. Are you taking advantage of “early pay” discounts where appropriate?
5. Have you explored using a commercial credit card to pay your vendors early while holding onto cash longer?

How well are you managing your accounts receivable?

1. Do you monitor and minimize the number and value of unbilled receivables?
2. Are invoices being issued electronically and automatically?
3. Are you making it easy to pay, through ACH payments or otherwise?
4. Are you using a bank lockbox or other method to receive funds quickly and efficiently?
5. Do you have solid contract terms and conditions laid out?
6. Do you have an established process to review and approve any non-standard conditions requested?
7. Do you have a clear credit risk management process implemented?
8. Do you offer dynamic discounting?

“We believe in forging a strong collaborative relationship when it comes to working capital management,” says Ginger Blake, Commercial Treasury Management executive. By collaborating closely with businesses to understand their unique payment processes and customer base, we can recommend effective cash management tools tailored to their specific needs.”

A company accelerating receivables while stretching payables may improve the time taken to convert investments in inventory or other resources into cash flow from sales – or the cash conversion cycle. But businesses need to be mindful of not excessively delaying payments or deploying aggressive collections tactics which could damage vendor relationships. An optimization strategy must be balanced and both customer and supplier friendly in order to be effective.

Are you leveraging technology and analytics?

With a rise in technology and innovation in the financial space, tools such as Enterprise Resource Planning systems, AI-driven analytics, and cloud-based accounting software offer real-time insights into AR and AP trends. These tools can help businesses:

• Forecast cash flows with greater accuracy.
• Identify bottlenecks.
• Optimize payment timing based on liquidity and due dates.
• Automate workflows to reduce operational costs.

“With effective accounts receivable strategies companies large and small can ensure a steady stream of incoming cash,” says Blake. “With disciplined accounts payable practices, they can preserve liquidity without risking the vendor relationship.”

“Our Treasury Management team offers a complimentary analysis through the Cash Flow Advisor® tool helping business owners and leaders understand their company’s cash flow management potential,” shares Blake. “The goal is to help businesses manage cash flow and deliver solutions tailored to their unique financial goals.”

Whether identifying an opportunity to slow-down payables or exploring workflow optimization to improve efficiencies, innovative tools and regular cash flow conversations may help businesses improve working capital.