To run a successful business, every cent counts, which is why no organization can afford to overlook its accounts receivable management. Especially for companies with multiple revenue streams, tracking what comes in and when becomes both critical and complicated.
Besides, poor AR management can hurt cash flow and cause operational hiccups, indicating deeper problems, risking financial stability, and missed growth opportunities. Therefore, to manage accounts receivable efficiently, you must focus on several key factors that ensure financial oversight and stability.
In this article, we will discuss some dos and don’ts to keep in mind for effectively managing your accounts receivable. Let’s start by understanding why efficient receivable management matters for businesses.
Importance of Managing Accounts Receivables
Managing accounts receivable is a comprehensive process that involves several critical steps. It requires careful oversight to ensure that all incoming payments are tracked, recorded, and collected promptly.
How effectively a business handles each of these, individually and collectively, determines how well a company is maintaining its cash flow and operational efficiency. When a business faces a delay in receiving payment from customers, it can lead to a cash flow shortage, which can prevent the company from meeting its financial obligations.
Moreover, an efficient receivable management system in place helps companies gain data-driven insights into customer behavior and payment trends. This, in turn, allows them to identify bottlenecks and take measures to resolve them.
Do’s of Receivable Management
- Evaluate customer’s creditworthiness
Before extending credit to any customer, you must carefully evaluate whether the customer is worthy enough to give the credit or not. This can be done by assessing the customer’s credit report, financial statements, trade references, etc. Doing so will help your company reduce bad debts and maintain financial stability.
- Establish a standard invoicing process
No business can expect its customers to make payments on time if it does not send the invoices accurately and timely. Therefore, you must have a standard invoicing process to ensure that there are no information discrepancies in the invoices and that they are being delivered to the customer on time.
- Decide net terms carefully
Payment net terms are the time frames within which a customer is expected to make the payment for goods or services purchased on credit, like Net 30, Net 60, Net 90, etc. You should decide on net payment terms after careful consideration of the customer’s payment history to enhance the chances of receiving timely payment.
- Implement a robust collection strategy
Your collection teams have a crucial role to play in managing accounts receivable, as they keep track of open invoices and make efforts to collect the payment on time. So, implement a strong collection strategy which includes sending reminders for outstanding invoices, making follow-up calls, emailing, or working with collection agencies if necessary.
- Leverage technology to streamline AR
Technological advancements in the finance industry, particularly, artificial intelligence (AI) and machine learning (ML), are transforming AR processes. Companies can utilize AI-based accounts receivable software to enhance efficiency by automating invoice
generation, sending timely and personalized payment reminders, and predicting customer payment behavior.
- Provide feasible modes of payment
With the evolution of digital payment methods, customers prefer different modes of payment like credit/debit cards, checks, wire transfers, and digital currencies. Thus, your business must adapt to these requirements and offer multiple modes of payment for convenience and flexibility. This will also increase the likelihood of on-time payment as well as customer satisfaction.
- Offer early payment discount
In order to encourage early payments, offering early payment discounts or incentivizing customers has proven to be an effective strategy for businesses. This is because such benefits motivate customers to pay ahead of schedule, ultimately improving cash flow and reducing the risk of overdue accounts.
- Charge late payment penalties
As you offer discounts for early payments, you must also charge penalties for late payments to deter delays and encourage timely settlements. For instance, the standard late fee on an invoice typically ranges from 1.5% to 2% per month of the overdue amount. However, you can negotiate the penalties depending on contract terms and customer relationships.
- Encourage customer collaboration
Open and clear communication channels ensure that you are working closely with customers to understand their needs and get their feedback. This builds stronger relationships and helps meet customers’s expectations better, ultimately fostering better AR management.
- Regularly monitor AR KPIs
Timely assessing how well your business is managing its accounts receivable is an essential practice to keep tabs on the company’s financial health. KPIs like Days Sales
Operating (DSO), bad debt ratio, liquidity, etc., must be monitored. For this, using accounts receivable management software can help you keep track of these metrics and streamline your financial operations.
Don’ts of Receivable Management
- Skip conducting credit checks
This is one of the common mistakes that businesses make. They extend credit to customers without checking their credit history, financial records, and creditworthiness. As a result, businesses often end up with bad debts and financial losses. Thus, it is essential for you to conduct a thorough credit check on potential customers.
- Follow inconsistent credit policies
Non-uniform credit policies are a threat to financial stability and operational efficiency. It can lead to confusion, perceived unfairness, and difficulties in managing accounts, potentially resulting in strained customer relationships. A well-defined set of credit policies can help you avoid these consequences.
- Not following up on time
Reminding customers about their pending payments is a crucial part of the collection strategy. If your business neglects timely follow-ups, it risks delayed payments, which can impact cash flow and increase the likelihood of overdue accounts.
- Ignore late payments
Receiving late payments from customers should not be ignored, as it can indicate underlying signs of the customer’s financial issues or cash flow problems. You must recognize and analyze the payment behavior of customers in order to take corrective measures to prevent financial risks.
- Set vague credit limits
When businesses do not clearly define credit limits for their customers, it can lead to confusion and financial risk. Further, this makes it difficult to manage exposure and can result in overextension of credit, putting your entire AR workflow in jeopardy.
- Rely on siloed records
Traditionally, businesses rely on multiple spreadsheets and documents to keep track of transactions. This siloed data is difficult to retrieve and can lead to information discrepancies. Centralizing data into a unified system can help you enhance accuracy in such cases.
- Use manual AR processes
AR management is indeed complex, but when managed manually, it becomes time-consuming and error-prone as well. This can introduce delays in invoicing, collection, and overall process inefficiencies. Here, you can choose to integrate an AR automation tool to maximize the efficiency of your receivable management.
- Neglect report reconciliation
If you do not review your account receivables reports, you lack visibility into your cash flow. Not only does this lead to booking inaccuracies and missed payments, but it can also nurture loopholes that can turn into bigger cash problems in the future.
- Follow a sluggish collection process
Delaying or poorly managing collections can lead to overdue accounts and hurt cash flow. Collection teams must take quick and proactive collection actions to handle receivables well, reduce bad debts, and keep finances stable.
- Ambiguous customer communications
If either the business or the customer lacks clarity on agreed-upon terms, it can lead to confusion and disputes. To prevent misunderstandings and ensure smooth transactions, you must communicate clearly and precisely, establishing well-defined expectations and agreements from the outset.
Bottom Line
Accounts receivable management indeed demands meticulous attention to detail, from extending credit to potential customers to tracking invoices, managing collections, and resolving disputes. All these tasks must be handled while maintaining a focus on customer relationships.
Ultimately, the goal of effective AR management is not merely to chase payments but to foster positive, long-term relationships with customers. Integrating modern-day accounts receivable automation solutions can help your businesses automate repetitive tasks and keep tabs on visibility into financial metrics. This enables you to scale your AR processes as the business grows.