Friday, April 19, 2024

The Link Between Client Payments and the Financial Health of a Company

Timely payments by clients are a must for any company to maintain its financial health. In other words, the activity of receivable accounts determines how a company can survive in the corporate sector. While every organisation wants to receive timely payments, very few of them strive to come up with any solution to make this process agile.

In this post, we will discuss how client payments, liquidity, and financial cycle are interconnected and how an organisation can improve these financial indicators by leveraging FinTech.

Liquidity/Solvency and Financial Cycle — Indicators Strongly Connected to Receivable Payments

Financial and economical experts have been using the parameters of liquidity, solvency ratios, and financial cycle to determine the progress of a business entity for decades.

Liquidity tells the status of an organisation regarding its ability to take care of its current bills and liabilities. The simplest liquidity ratio is determined by dividing the aggregate of current assets by the aggregate of current liabilities.

Solvency sketches the financial condition of an organisation for the long term. It is calculated by adding net income and depreciation and then dividing them by the sum of short and long-term liabilities.

The financial cycle is another indicator used to describe the financial health of a business. Its calculation goes like that:

Financial Cycle = Inventory life period + accounts receivable life period – supplier credit life period.

The duration of the financial cycle tells about the efficiency of the working capital consumption.  Companies that manage to have shorter financial cycles put up efficient (and mostly profitable) use of working capital.

Client Payments/Receivables — The Common Denominator among Liquidity, Solvency, and Financial Cycle

If you look at the definitions and formulas of the financial indicators discussed above, you will notice that receivables directly influence those parameters.

For instance, the “current assets” in liquidity include the client payments. Similarly, the net income in financial competence calculations can’t be calculated without taking into account the entire receivable amount. Similarly, the “account receivable life period” indicates the time it takes for payment to travel from the client’s account to your account.

The speed of client payments greatly affects the liquidity and financial cycle since they are calculated for shorter terms. If a business doesn’t receive timely payments, it will continue to struggle in maintaining its liquidity. Moreover, delayed payments mean a lengthy “account receivable life period” that extends the financial cycle as well.

FinTech Addresses this Business Pain Point

Delayed payments are one of the most recurring pain points in the commercial landscape. They hurt the financial indicators of any business operationally doing quite well. The budding domain of Financial Technology (FinTech) aims to solve this problem. There are modern FinTech features that help businesses to improve the receivable policy of their accounts, digitise invoices, track invoice payment, and increase the speed of invoice payment.

One such FinTech solution is Invoicing (Paylink) by DECTA.

Different surveys and focus group studies suggest that the majority of customer payments are delayed due to the complexity of the process. DECTA has understood this underlying issue behind delayed payments and introduced an invoicing/billing system that stimulates customers to make payments instantly.

It boasts an integrated online payment system with a user-friendly interface and convenient process flow. Customers can easily navigate through it and make payments even from their cell phones. When customers get a payment option where they can clear their dues within few taps and a couple of seconds, they rarely delay their outstanding payments.

Another impressive thing about DECTA’s Invoicing (Paylink) is it serves both sides of the table. On one hand, it saves customers’ time and makes payments convenient for them. On the other hand, it increases the proportion of paid invoices and reduces the bill payment period cycle. This improvement subsequently increases the organisation’s liquidity ratio and shrinks its financial cycle.

In short, the integration of Invoicing (Paylink) by DECTA in the operations of your receivable account can ultimately help your business to improve its financial health.

If you need Invoicing (Paylink) or any other trusted, effective, and innovative payment solutions for your business, get in touch with DECTA. The organisation believes in serving its clients with a host of FinTech and e-commerce solutions on the foundation of experience, flexibility, innovation, and trust.

Sam Allcock
Sam Allcock
Sam heads up Cheshire-based PR Fire, an online platform that has already helped over 10,000 businesses to grab widespread media coverage on their news at an extremely accessible price point.

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