How to Master Customer Outstanding Balances?Discover its definition, calculation method, methods for optimization, and differences with supplier outstanding balances.
Corporate finance is filled with concepts and terminologies that may seem complex to the uninitiated. One such essential term is customer outstanding balance, a key metric in the world of business management. In this article, we will define customer outstanding balance, explain how to calculate it, and discover its importance in a company’s financial management.
Definition of Customer Outstanding Balance
Customer outstanding balance, also known as outstanding billing, refers to the total amount of receivables that a company has from its customers at a given time. In other words, it represents the total sum owed by customers to a company for goods and services provided. Mastering customer outstanding balance is a critical skill in business management, as it provides an accurate insight into the company’s financial performance and cash flow.
Calculating Customer Outstanding Balance
Calculating the customer outstanding balance is a simple yet crucial task. It is determined by the sum of all invoices issued by the company that have not yet been settled by its customers. Here is the formula:
Customer Outstanding Balance = (Current Invoices + Overdue Invoices) - Payments Received
Regular monitoring and management of customer outstanding balance are essential, as a high outstanding balance can signal difficulties in collecting receivables, affecting the company's liquidity and financial stability.
Challenges in Managing Customer Outstanding Balance
Managing customer outstanding balance presents challenges for many companies. The main issue is the risk of non-payment or payment delays, which can negatively affect the company's cash flow. Long or unpredictable payment periods can also pose problems, as they can make financial planning difficult and limit the company's ability to reinvest in its operations or to seize growth opportunities.
Customer Outstanding Balances vs Supplier Outstanding Balances
While customer outstanding balance refers to the money owed to the company by its customers, supplier outstanding balance represents the money that the company owes to its suppliers. In other words, the customer outstanding balance is an asset for the company, while the supplier outstanding balance is a liability.
Managing both customer and supplier outstanding balances is a crucial aspect of cash flow management. A high customer outstanding balance can mean that the company has a lot of money owed to it, which can affect its liquidity if customers are slow to pay. On the other hand, a high supplier outstanding balance can indicate that the company has a lot of short-term debts to settle, which can also affect its liquidity if it does not have the necessary funds to pay its suppliers on time.
How to Optimize Customer Outstanding Balance?
Optimal management of customer outstanding balance is vital for the financial health of any business. Here are some effective strategies to optimize customer outstanding balance:
- Establish a Clear Credit PolicySetting a clear and consistent credit policy is the first step to optimizing customer outstanding balance. This includes clearly defined payment terms and conditions, criteria for assessing customer creditworthiness, and processes for managing payment delays.
- Organize Prompt and Accurate InvoicingPrompt and accurate invoicing can help reduce payment periods and thus optimize customer outstanding balance. Ensure your invoices are accurate, complete, and sent promptly after the delivery of goods or services.
- Implement Collection StrategiesImplementing effective collection strategies is essential to ensure invoice payments. This can include measures such as using collection agencies for overdue accounts, introducing penalties for late payments, and understanding the legal aspects of debt collection.
- Set Up a Reminder ProcessSending payment reminders before the invoice due date and offering flexible payment options are examples of reminder strategies that can encourage timely payments and help optimize customer outstanding balance. Automating reminder processes can also be beneficial.
- Regularly Monitor Customer AccountsRegular monitoring of customer accounts allows for early detection of payment delays and taking steps to collect owed amounts. Use a customer account management system to track payments and send automated reminders for unpaid invoices.
- Offer Incentives for Prompt PaymentOffer incentives, such as discounts, to encourage customers to pay their invoices quickly. This can help reduce payment periods and speed up cash flow.
- Train StaffEnsure your staff understands the importance of managing customer outstanding balance and is trained in best practices in credit, collection, and reminder processes. This can help ensure that your team is proactive in managing customer outstanding balance.
The Link Between Customer Outstanding Balance and Factoring
Customer outstanding balance is directly linked to another key concept in business management - factoring. Factoring is a financial solution that allows businesses to turn their unpaid invoices into immediate cash. In other words, a company sells its unpaid invoices to a factoring company, which then pays an advance on these invoices, usually between 70% and 90% of their total value. It's a valuable tool for businesses looking to optimize their customer outstanding balance management.
Factoring in Action: Mastering Customer Outstanding Balance
Factoring can help businesses master their customer outstanding balance in several ways:
- Improving Cash Flow: Factoring turns unpaid invoices into cash, improving the company’s cash flow. This means the company has more resources to invest in its operations and growth.
- Reducing Default Risk: The factoring company can assume the risk of invoice non-payment. This allows the company to focus on its core business without worrying about payment defaults.
- Handling Collections: Factoring companies take over the invoice collection process. This can free up time and resources for the company, allowing it to focus on other aspects of its operations.
Flowie: The Platform to Help You Master Your Customer Outstanding Balance
Flowie is a platform that simplifies the management of your customer outstanding balance, offering clear and precise visibility on your receivables in real time. You can track all your issued invoices, their current status, and receive real-time notifications for each action taken on an invoice.
For example, you are notified when your customers schedule their payments. This allows you to better anticipate your cash inflows, thus optimizing the management of your customer outstanding balance.
Moreover, Flowie offers effective tools to optimize collection and reminder processes. These tools can help minimize payment delays, improve communication with clients, and reduce customer outstanding balance.
It is a solution for companies looking to master their customer outstanding balance, simplify invoice management, and efficiently utilize billing data.
See for yourself by booking directly a demo with our expert team here.