What You’ll Learn:
- The true value of your accounts receivable
- When to leverage your AR as a growth asset
- How to tap into your AR value for increased cash flow
Your accounts receivable can be so much more than a passive asset. If you know how to strategically leverage your AR, it can become a dynamic growth tool that sets you up for success.
Explore the true value of AR and determine when you’re ready to use it to optimize cash flow and fuel expansion.
Understand the true value of your AR
Big numbers in your accounts receivable records can feel like an accomplishment. Lots of money coming in is great! But the raw data doesn’t tell the whole story. The value of your AR depends on more than that simple sum. You have to dig deeper to understand the nuances of your financial health.
For example, a high AR balance coupled with slow collection times might indicate underlying issues like inefficient processes and lenient credit terms. A slightly smaller AR balance might look less impressive, but could indicate stability if you have consistent payments and a diverse set of recurring clients.
The takeaway? If you only look at the AR balance, you might miss opportunities to optimize your processes and rely on your strengths.
A full understanding of your AR value empowers you to make informed decisions. You can tap into healthy AR as a resource for increased cash flow and potential growth.
Put your best foot forward with investors
Beyond internal analysis, your AR is a significant indicator for external stakeholders. Potential investors use AR-related insights to assess your company’s liquidity, operational efficiency, and credit risk. Well-managed AR demonstrates financial stability and competence, both factors investors look for when deciding whether to provide you with funds.
Consider when to use AR as a growth asset
Leveraging your AR as a growth asset takes thoughtful strategy. You want to invest in efforts that align with your business goals without creating a cycle of cash flow struggles.
Before you consider using your AR to front cash flow or woo investors, ask yourself these questions:
Is this growth opportunity significant enough?
Your ROI must be worth the time and effort the project requires. Leveraging AR for a loan or other cash influxes often comes with a fee. For the right project, that expense can be worth it. For the wrong one, you’ve used up money that could be better spent on other investments.
AR can be used as a growth asset to support funding a new contract, investing in inventory for anticipated demand, or accelerating research and development. You should carefully weigh the costs and benefits of any project like this before proceeding with AR-backed funding.
Does the timing align?
Accounts receivable collections happen on a schedule, so the timing must be right to leverage AR for growth opportunities. If you expect your AR to grow significantly in the near future, you’ll have more power to leverage if you wait until that happens. On the other hand, if the growth opportunity is time-sensitive, a frontload of cash can make a big difference in your success.
Is cash flow the primary bottleneck?
AR financing doesn’t solve all the financial and logistical problems with business operations. If cash flow timing is your primary bottleneck, AR-focused strategies can be a powerful tool for growth. If roadblocks lie elsewhere, like sales teams or process approvals, this might not be the best path for growth.
If you answered yes to these questions, your AR may be the key to your company’s next steps.
Unlock the power of AR for growth
Do you know if your AR is healthy? You can gain valuable insights with a few easy calculations. Look at your days sales outstanding and average AR aging schedule. Quick and on-time payments from your clients generally indicate good conditions. See our checklist for determining AR health to get a full picture.
If you determine that your AR is healthy (great work, by the way!), you need to unlock the capital held in your receivables. Companies generally gain access to their invoice-held cash flow via invoice factoring or AR lines of credit.
Invoice factoring is the process of selling unpaid invoices to a third party, known as a factor. It’s not a loan; it’s the sale of an asset. You transfer ownership of individual invoices to the factoring company in exchange for a percentage of the invoice price (minus fees). You have cash in hand, while they take over collections.
AR lines of credit look at your accounts receivable as a whole asset to determine a loan limit. A lender grants you a loan amount, which you can borrow against—then pay back and borrow against again, as needed. The more cash flow potential you have with larger AR amounts, the larger your line of credit generally is.
Depending on your overall AR health and cash flow, either of these options may be beneficial for you. Invoice factoring is typically quick and easy to qualify for. An AR line of credit keeps all your invoices fully in your control and offers more financial flexibility.
With Hopscotch Flow, you balance these benefits. Flow offers a line of credit that can be easier to qualify for than traditional loans. There are no hard credit checks, and Flow integrates into your accounting process for easy money management.
Potential growth scenarios for using an AR-linked line of credit
You’ve weighed your options and the timing. If you’re ready to leverage your AR, what does that look like? You can use funds to jumpstart whatever goals you have.
Strategic growth opportunities might include:
- Hiring new employees or contractors to serve a big new client
- Adding a new person to the sales team to increase AR long term
- Launching a seasonal marketing campaign to drive new sales
As you invest in new projects, the power of your AR value can scale with you to unlock even more potential and more future growth.
Tap into your AR potential with Hopscotch Flow
Hopscotch Flow is an AR-backed, always-on line of credit that can support your growth. Your borrowing potential is based on the business you’re already bringing in—no hard credit checks or investor proposals needed.
Ready to pursue your financial goals?
Get approved for Flow and take the next steps toward growing your business.
Bret Lawrence
Writer
Bret Lawrence writes about invoicing and cash flow management at Hopscotch. Her previous roles include senior financial writer at Better Mortgage, where she covered lending and the home buying process. Her writing is not financial advice.
