7 Proven Methods to Unlock Trapped Cash and Improve Working Capital

In today’s dynamic economic landscape, businesses face increased challenges in managing cash flow. Delayed payments, operational inefficiencies, and outdated accounts receivable (AR) processes are just a few factors that lead to cash being trapped within your company. However, by optimizing your AR workflow, you can unlock that cash, fueling growth and ensuring financial stability.

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In this guide, we’ll walk through seven methods to help you unlock trapped cash, improve liquidity, and enhance customer relationships. By adopting these strategies, your business will become more agile and better equipped to navigate any economic climate.

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1. Know and Track Your KPIs

When it comes to cash flow and AR management, data is your best friend. Monitoring the right Key Performance Indicators (KPIs) gives you the insights necessary to identify inefficiencies, uncover trends, and make proactive decisions. Here are three KPIs that every AR team should be tracking:

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Days Sales Outstanding (DSO): This metric shows the average number of days it takes to collect payments from customers. A lower DSO indicates faster collections, which means cash enters your accounts more quickly. If your DSO is higher than your industry average, it’s a sign that you should review your payment terms or collections process.
Turnover Ratio: This ratio measures how many times your receivables are converted into cash over a specific period. A higher turnover ratio means your AR team is working efficiently to collect payments, while a low ratio may signal that your credit or collection processes need attention.
Collections Effectiveness Index (CEI): CEI tracks how effective your collections efforts are over time by comparing receivables at the beginning and end of a period. This KPI helps you understand how successful your team is at recovering overdue payments and optimizing collections.

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By regularly reviewing these KPIs, you’ll not only stay informed about your cash flow health but also spot opportunities to make improvements. Remember, the goal is to have visibility into your receivables so you can act quickly and avoid cash flow bottlenecks.

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2. Take Control Over Payment Terms

Many businesses follow a one-size-fits-all approach to setting payment terms, but this can hinder cash flow. Instead, customize payment terms based on your relationship with each client and the value your business offers. For example, long-standing customers with excellent payment histories may be rewarded with more flexible terms, while new clients or those with erratic payment patterns should be encouraged to stick to shorter timelines.

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Here are a few strategies to consider:

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Offer Early Payment Discounts: Encouraging customers to pay earlier by offering a small discount can drastically improve your cash flow. Even a 1-2% discount can incentivize customers to settle their invoices faster, unlocking trapped cash sooner.
Enforce Late Payment Fees: Instituting penalties for overdue payments creates an incentive for clients to pay on time. This practice is especially useful for larger customers, where your business may have substantial leverage to negotiate terms.

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By carefully structuring your payment terms, you can optimize cash flow without straining client relationships. In fact, customers may appreciate clear guidelines and incentives that make payments smoother and faster.

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3. Deliver a 5-Star Payment Experience

The customer payment experience is an often overlooked part of the AR process. Yet, it’s crucial to ensure that your customers have an easy, efficient, and reliable way to settle their invoices. If the payment process is complex or inconvenient, customers are likely to delay payments, which can lead to cash being trapped unnecessarily.

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Businesses should focus on offering a seamless payment experience by:

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Implementing a customer-facing payment portal: A portal allows customers to view their invoices, payment history, and make payments all in one place. This eliminates confusion and makes it easier for customers to settle outstanding balances quickly.
Offering multiple payment methods: Ensure your payment portal accepts various methods such as ACH, wire transfers, and credit cards. The more options you provide, the fewer barriers your customers will face when it’s time to pay.
Enabling early payment discounts: Simplify the process of offering and applying discounts for early payments, so customers can benefit from paying sooner rather than later.

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A stellar payment experience not only unlocks cash but also fosters better client relationships. Businesses that prioritize this aspect of AR often report faster payment times and improved customer satisfaction.

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4. Track Customer Payment Patterns

To unlock trapped cash, you need to know your customers' payment behaviors. Not every client will follow the same payment habits, and by recognizing these patterns, you can adjust your collections strategy accordingly. Tracking payment behaviors allows your team to identify:

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Clients who consistently pay on time,
Customers who often delay payments, and
Those who may require closer monitoring.

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Manual tracking of payment behaviors can be inefficient, especially as your business grows. That’s why many companies now use AI-powered tools like Centime to automate this process. By analyzing historical payment data, AI tools can predict future behaviors, estimate delays, and provide more accurate cash flow forecasts.

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For instance, Centime’s platform uses advanced algorithms to analyze customer payment patterns and predict delays, which allows businesses to communicate proactively with clients and manage their cash flow more effectively.

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5. Automate Payment Reminders

Missed payments don’t always result from intentional delays. Sometimes internal issues within your customers’ organizations, such as staff turnover or vacation, can lead to delayed payments. That’s where automated payment reminders come in.

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Automating reminders ensures that customers are regularly notified about upcoming or overdue payments. This approach reduces the need for manual follow-ups and increases the likelihood of on-time payments. Personalize the reminders by setting specific intervals based on each client’s payment patterns, and adjust the tone of communication based on the relationship.

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Platforms like Centime make it easy to customize reminders, ensuring that they are sent at optimal times without overwhelming clients. Automated reminders reduce overdue invoices, keeping cash flowing and freeing up your team’s time for other critical tasks.

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6. Optimize Collections with a Personal Touch

Even in a world of automation, manual intervention still has its place in the AR process. Automated reminders and follow-ups are useful, but when dealing with overdue accounts, sometimes a personal touch is needed. Picking up the phone and having a direct conversation with your customer can provide valuable context for why payments are delayed.

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For example, a real-time conversation might reveal that a client is facing short-term cash flow problems, and you could negotiate a payment plan that benefits both parties. However, manual interventions can be time-consuming, so it’s essential to strike the right balance between automation and human involvement.

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To optimize collections, use a digital platform that tracks customer communications and provides a comprehensive view of payment history. Having a complete record of previous interactions allows your team to approach each situation with the right context, ensuring more effective and empathetic conversations.

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7. Update Your Cash Forecast

Cash forecasting is an indispensable tool for any business looking to stay financially healthy. However, many teams fail to consider their AR function when making forecasts, leading to discrepancies between projected and actual cash positions. Integrating AR data into your cash forecasting process allows you to have a clearer picture of your company's financial trajectory.

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By factoring in variables like payment delays, partial payments, and customer behaviors, you can improve the accuracy of your forecasts. This ensures that your business can better prepare for upcoming expenses and plan for growth opportunities without being caught off guard.

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Unlock Trapped Cash with Centime

Addressing the challenges of AR management can significantly improve your business's liquidity. By leveraging Centime’s AR automation solution, companies can streamline their collections processes, reduce overdue payments, and optimize working capital. Whether it's automating reminders, tracking customer payment patterns, or enhancing your cash forecasting, Centime provides the tools to unlock trapped cash and improve financial health.

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**Deposit placement through ICS is subject to the terms, conditions, and disclosures in the applicable agreements. Although deposits are placed in increments that do not exceed the FDIC standard maximum deposit insurance amount (“SMDIA”) at any one destination bank, a depositor’s balances at the institution that places deposits may exceed the SMDIA (e.g., before settlement for deposits or after settlement for withdrawals) or be uninsured (if the placing institution is not an insured bank). The depositor must make any necessary arrangements to protect such balances consistent with applicable law and must determine whether placement through ICS satisfies any restrictions on its deposits. A list identifying IntraFi network banks appears at https://www.intrafi.com/network-banks. The depositor may exclude banks from eligibility to receive its funds. IntraFi and ICS are registered service marks, and IntraFi Cash Service is a service mark, of IntraFi Network LLC.

^††3.5% Annual Percentage Yield (APY) as of 11/19/24. Deposit rate may adjust to current market rate and may change daily. Fees may reduce earnings.

*Centime is not a bank and is not authorized by any federal or state agency to engage directly in core banking activities.
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*All banking products and services available through Centime are provided by FNBO and are governed by the applicable agreements and related disclosures provided to you by FNBO. Member FDIC.
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‍*While Centime facilitates traditional banking activities (such as the acceptance of deposits or extensions of credit), these services are actually provided by our banking partner, FNBO.
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*Centime may provide support services to FNBO, as permitted by applicable law, to facilitate the delivery of its bank products and services.

**Deposit placement through ICS is subject to the terms, conditions, and disclosures in the applicable agreements. Although deposits are placed in increments that do not exceed the FDIC standard maximum deposit insurance amount (“SMDIA”) at any one destination bank, a depositor’s balances at the institution that places deposits may exceed the SMDIA (e.g., before settlement for deposits or after settlement for withdrawals) or be uninsured (if the placing institution is not an insured bank). The depositor must make any necessary arrangements to protect such balances consistent with applicable law and must determine whether placement through ICS satisfies any restrictions on its deposits. A list identifying IntraFi network bank

7 Proven Methods to Unlock Trapped Cash and Improve Working Capital

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