From Order to Cash: Understanding the Impact of Receivables on Financial Statements

We learn in Accounting 101 that accounts receivable (AR) sits on a company’s balance sheet as an asset, representing money owed. But understanding the impact of AR on a business’ financial health is more difficult to get a handle on.

It is important to look at the AR turnover ratio – the number of times a business has collected its AR balances during an accounting period. The turnover ratio “is considered an indicator of both how efficient the company is collecting its debts and the credit quality of its customers,” Investopedia tells us. “Further analysis would include assessing days sales outstanding (DSO), which measures the average number of days that it takes a company to collect payments after a sale has been made.”

Accounts Receivable: A Crucial Choke Point in Brokerage Operations

AR is “one of the most important line items on a company’s balance sheet,” Investopedia said, pointing out that “the shorter the period of time a company has accounts receivable balances, the better, as it means the company can use that money for other business purposes.”

In the highly competitive and volatile freight brokerage industry, efficient AR management is absolutely critical.

A Deloitte report said that “some businesses don’t realize how much cash is trapped on their balance sheets. Freeing up that cash – by optimizing their working capital – delivers more than improved operational efficiency. It also gives companies the added liquidity they need to fund growth, reduce debt levels, lower costs, maximize shareholder returns, and even outperform their competitors.”

Evaluating the Health of Your Accounts Receivable Process

“One of the leading causes of poor financial health for a business is poor cash management,” eCapital said. “Knowing when to expect payment from customers is a critical element of optimizing cash flow efficiencies.”

Take a close look at your AR turnover ratio. A higher AR turnover ratio signals that your back office has an efficient collections process and works with customers who pay in a timely manner. A low AR turnover ratio indicates that your collections processes are inefficient or that customers may be financially unstable.

AR turnover ratios can be improved through methods such as timely invoice issuance, proactive collections, and streamlined cash application.

DSO calculates the number of days it takes to collect receivables after a sale. A high turnover ratio combined with a low DSO indicates your back office has an efficient collections process. However, a low turnover ratio and a high DSO are signs that you need to streamline your collections practices.

“Assess results to help plan strategies to improve the collection of outstanding accounts receivables. The quicker a company receives invoice payments, the faster cash can be reinvested to pay financial obligations, fund operations, bankroll growth, and help improve financial stability,” eCapital said.

Businesses should also conduct an AR aging analysis to categorize receivables according to the length of time invoices have been outstanding.

“If the accounts receivable aging shows a company’s receivables are being collected much more slowly than normal, this is a warning sign that business may be slowing down or that the company is taking on greater credit risk in its sales practices,” Investopedia said.

Three Strategies for Optimizing Receivables Management

“While no company intends to adopt weak accounts receivable policies, lack of planning, poor enforcement or a failure to focus on the function can result in unintended consequences,” Deloitte said, explaining that AR management risks include:

• Failure to follow up with customers in a timely manner when payments are past due.
• Allowing sales reps to override credit limits.
• Not training staff on how to deal with late-paying customers.
• Failure to check the accuracy of invoices.
• Allocating cash payments incorrectly.

Today, it is possible for freight brokerages to optimize their AR management by implementing automated invoicing solutions, enhancing the collections process, and leveraging data analytics.

Implementing Automated Invoicing Solutions

“Automation is at the forefront of the technological revolution in freight brokerage,” an article, “How Technology is Revolutionizing Freight Brokerage,” said, pointing out that in invoicing, in particular, automation streamlines the process, “reducing paperwork and ensuring timely payments. This not only improves cash flow but also strengthens relationships with carriers. Automated systems can also handle discrepancies more efficiently, quickly identifying and resolving issues related to billing.”  

Automation also is vital in the cash application process.

“As payments come in, it’s essential they be applied both to the right customers and to the specific customer invoices they relate to,” Deloitte said. “And this needs to be done on a timely basis so you always know which accounts are up-to-date and which are outstanding. Otherwise, it’s impossible to track which customers paid on which invoices – making follow-up on late payments a virtual nightmare.

“Companies that get this wrong often waste considerable time and resources reissuing and even amending reconciliation reports where their systems can’t ‘reverse’ incorrect cash applications.”

Enhancing Collections Processes

Improving DSO means getting customers to pay faster, according to eCapital, which said ways to make that happen include:

• Clear billing policies
• Fast invoicing
• Early payment discounts
• Payment reminders
• Online payments
• Communication with late payers

Deloitte advised strengthening your back office’s processes to ensure your reporting is accurate, implementing frequent and consistent collections efforts, and automating processes to avoid manual entry errors.

Leveraging Data Analytics

Consultant Asif Rehman wrote in a LinkedIn article that the advantages of using data analytics in AR operations include:

• Enhanced cash flow management. “By analyzing historical payment patterns, data analytics can help businesses predict when customers are likely to make payments. This insight enables better cash flow forecasting and planning, allowing organizations to manage their resources more effectively,” Rehman said.
• Identification of risk factors. Data analytics can identify customers that pose a higher risk of default and tailor collections strategies to mitigate potential losses.
• Personalized collection strategies increase the “likelihood of timely payments while maintaining positive customer relationships,” he said.
• Early warning signs. Data analytics can help back offices detect early signs of payment delays or defaults and enable timely intervention.
• Process efficiency. “Data analytics can streamline accounts receivable processes by automating routine tasks such as invoice generation, payment reconciliation, and follow-up emails,” Rehman said. “This frees up valuable time for finance teams to focus on strategic activities.”

Upwell: Actionable Solutions to Simplify Accounts Receivable

With Upwell, freight brokerages are seeing a four-day decrease in DSO, a 50% decrease in operational expenses per employee, and a 10% increase in cash flow.

Years of experience in trucking and logistics have helped us learn the best strategies for handling overdue payments and minimizing payment disputes. We help freight brokerages build collaborative relationships with their customers through exceptional service and open lines of communication to facilitate prompt payments.

Our solutions include Automated Statements & Payments Reminders, which help freight brokerages set up automated, customizable communication sequences that nudge customers toward fulfilling their payment obligations.

These automated, customizable reminders ensure that no invoice goes unnoticed and that every customer receives timely communications tailored to their relationship and payment history. This transforms the tedious task of collections into an opportunity to reinforce trust and reliability.

From pre-auditing invoices to ensure accuracy to streamlining payment collections, Upwell’s back-office software automates legacy processes, enabling freight brokerages to quickly accept payments and access extra capital. By taking advantage of artificial intelligence (AI), freight brokers can quickly resolve the invoice exceptions that are preventing them from getting paid.

Upwell Utilizes Automation from Order to Cash

Upwell has harnessed the power of AI to transform the order-to-cash process. We have automated freight finance processes, including invoice distribution, to ensure each bill reaches its destination exactly as customers require, whether that’s through electronic data interchange (EDI), application programming interface (API), email, or directly into online portals.

Our Smart Invoices solution automates the extraction of invoice details and documents, eliminating manual data entry errors.

Upwell’s Last Check leverages large language models to pre-audit invoices against customer-specific rules, ensuring each one is accurate and complete. This eliminates errors and time spent on manual checks.

Our Online Payment Portal & Options feature offers customers a variety of payment methods through a secure, easy-to-use portal to accelerate cash flow and improve the customer experience.

Upwell’s Cash Application/Remittance Processing feature ensures payments quickly find their matching invoices, transforming what used to be a painstaking process into a seamless and error-free operation.  

We are empowering freight brokers with technology to streamline their back-office processes from order to cash.

Get an Upwell demo today.

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