Many business owners don’t realize how important it is to have a solid account receivable management strategy, and as a result, their businesses suffer.
The following Accounts Receivable best practices can make life easier for you, your team, and your customers.
Why is an Accounts Receivable (AR) Process vital?
It’s essential to manage the debt your company is owed for many reasons, but cash flow is one of the most crucial. If a business doesn’t collect its payments properly, especially if this problem persists and late payments are widespread, the company may not have enough money to keep running.
It’s also critical to have a comprehensive and uniform payment collection policy if you want to keep good relationships with your customers and preserve your firm’s reputation. Poor customer interactions might hurt your company’s client retention and prospects for obtaining excellent bargains.
Being paid on schedule also helps to keep cash flow and working capital flowing, allowing providers to be paid on time. This is crucial for vendor connections since it guarantees that rebate or discount payments are made on time.
Finally, the strength of your Accounts Receivables process may influence your ability to expand as a company and your interactions with investors. Cash collections, cash flow, and liquidity will impact your balance sheet and bottom line.
Investors and lenders will want to know whether your company has a good track record for collecting payments as evidence of a healthy cash position.
Accounts Receivable Process flow chart
In most organizations, the Accounts Receivable process will follow a similar workflow. The steps may change based on the size and complexity of your organization, but all AR processes go through the same easy steps:
- This occurs when a business and a customer interact, resulting in the sale and/or delivery of a product or service.
- After the transaction is completed, the company’s Accounts Receivable staff will issue an invoice to the consumer.
- Customers are charged immediately if they do not pay within a certain period, generally 30 days, or in regularly defined periods for those purchasing on credit.
- Other actions may follow up depending on the situation, such as payment reminders, late notices, and possible collections.
- After the payment is collected or written off, the transaction is reconciled
- It’s one thing to grasp the basics of Accounts Receivable. It’s something else entirely to manage it successfully.
Top 15 Accounts Receivable (AR) best practices
Take a look at 15 Accounts Receivable (AR) best practices below that can help you business
1. Send invoices within 48 Hours
If you’re requesting payment from a customer, whether for sales or services, issuing an official invoice is the best way to protect yourself in case of future disagreements.
You should send your invoice immediately, if possible, within 48 hours after completing or delivering the goods. Customers are more likely to pay promptly if you send invoices immediately since the service or product is still new in their minds.
2. Personalize invoices
Customized invoices provide a beautiful aspect to the invoice. However, using your brand’s colors and design to distinguish your invoices from others helps them stand out and promote your business. Customers can easily recall your bills if they can identify them quickly.
3. Have a formal credit policy
A credit policy helps protect businesses from customers who don’t pay on time. Before extending credit to customers, business owners must put them through a strict vetting process that includes setting requirements and conditions that would identify the good debtors.
For example, by setting maximum credit limits, you may limit the number of purchases customers can make on their accounts. You may raise credit limits according to the customer’s payment history along the way.
4. Be active when customers miss a payment deadline
Although giving customers the benefit of the doubt is always good, you shouldn’t be lax about it. Generate an Accounts Receivable report at least once a week so you can keep track of which payments are coming due or have already passed their due date.
The sooner you reach out to a customer about their delinquent payments, the easier it will be to resolve. Leaving slow-paying customers unpaid only worsens the situation. Making a phone call as soon as possible is all it takes to get things back on track.
You can send a collection letter by mail or email within 48 hours of your original call, depending on what format the customer prefers.
5. Utilize sales orders to manage orders efficiently
Sales orders help your employees confirm that the products awaiting shipment correspond with the details and specifications of the customer’s order. Checking the sales order during fulfillment helps prevent errors in getting the goods ready for shipping.
6. Use invoicing software
Using an invoicing solution reduces your workload and speeds up the process of generating, sending, and monitoring bills.
7. Integrate A/R with accounting software
Make sure A/R payments can be tracked and recorded using software linked to the banking software used to record deposits and reconcile bank accounts. This will guarantee that bank account check deposits match the A/R payments received.
8. Segregate A/R duties
In a firm with one bookkeeper, the person who issues invoices should also be in charge of receiving and applying checks to outstanding bills. In small firms with only one bookkeeper, the owner should examine all incoming cheques for accuracy before handing them over to the bookkeeper.
9. Address customer concerns
The most common reason consumers don’t pay on time is dissatisfaction with their service or product. Have a method in place for addressing their concerns so that they may be connected with the appropriate person, ideally not your A/R clerk, since they are likely to be ineffective because they are rarely involved in this business area. Before making any collection calls, client issues must be addressed.
10. Monitor A/R efficiency
To assess how successful your firm is at obtaining A/R quickly, use the A/R turnover ratio to measure how many times you convert A/R into cash. Assume that 2021 is a year with a 3.5% A/R turnover rate.
However, the A/R turnover will fall to 2.5 in 2022. It’s better if the A/R turnover is higher, so we may infer that collecting our A/R was more difficult in 2021 than in 2022. You should keep track of how the turnover ratio varies over time as you put new policies and procedures in place.
11. Maintain accurate customer data
It is crucial to have a centralized controller data process to ensure the accuracy of customer accounts and information. This will establish and maintain a compelling Accounts Receivable process.
Inaccurate addresses can cause invoices to be mailed to the wrong place, which then causes payments to arrive late.
To detect anomalies, such as unusual or improper payment terms, credit limits, and the like, account records should be checked regularly. Customer data should be updated correctly, and controls established to prevent unauthorized people from accessing or changing that information.
12. Establish a clear, concise credit approval process
It’s extremely easy to overspend to boost revenues. Extending credit may be beneficial, but a framework must be established and followed. It should explain when and how to assess and override credit limits, when to put accounts on hold, and how the application procedure works.
When circumstances change, rigorous checks of the approval process should be done on a regular basis.
13. Offer a variety of payment methods
Assigning customers the opportunity to pay through ACH (automated clearing house) or credit cards can shorten the time it takes to pay their invoices, compared to if they had to sign and mail a physical check. Nowadays, electronic payments can be made quickly and easily from a mobile phone or device.
14. Input customer payments immediately
By immediately applying customer payments to the specific invoices in the accounting records, management will always have an accurate and up-to-date Receivable Aging report.
15. Forecast recurring revenue
To forecast and schedule future invoicing, businesses that provide services on a monthly, quarterly, or annual basis should create unique accounting methods.
Accountants can use forecasting to compare month-over-month invoicing for these recurring expenses against forecasts to determine whether any clients were missed. If charges are the same each month, consider automating the procedure so that bills are sent out on the same day monthly, as this may cause unexpected delays.
Why should businesses outsource Accounts Receivable service?
The pandemic has driven home one lesson above all others: you must have a consistent collection procedure, focusing on your cash flow. A firm will suffer from missing client payments, accounting mistakes, negative cash flows, delayed funding expansion plans, and business debt defaults if it does not establish an expertly managed AR function.
Outsourcing AR is a great solution if your business doesn’t have the in-house expertise or resources to build a strong accounts receivable team. With an outsourced service, you can improve collections on invoices, optimize working capital management, and strengthen client relationships.
In addition, the outsourced Accounts Receivable partner will help you choose and implement AR processes and systems that fit your company to garner payments more quickly.
Benefits of outsourcing Accounts Receivable
Businesses that have weathered the epidemic and even prospered are the ones that were able to adjust their service delivery and payment collection methods to the new normal. Although many industries have shown indications of development by the latter half of 2021, a return of economic shut-down never appears far distant.
Companies need to continue fine-tuning their Account Receivables strategy to get paid more quickly and effectively.
Even a modest organization’s AR procedures may need a significant investment of resources (technology, personnel, and training). Given the present economic climate in the US and worldwide, many CFOs and CEOs are unwilling to take that chance.
In such a situation, outsourcing Accounts Receivables is one of the most viable and efficient ways to decrease Day Sales Outstanding (DSO) numbers and receive payments faster.
The ability of AR vendors to revolutionize an existing AR flow and offer new capabilities to simplify the entire billing and collections process is undisputed.
5 concrete advantages your business will experience by outsourcing Accounts Receivable
Faster payment collection
Although raising invoices and sending automated reminders are important for getting paid in business, friendly contact with clients is also vital to ensure that your requests for payment are prioritized.
However, most credit departments may not be able to follow up effectively. Accounts Receivables outsourcing providers make sure that your customers who are overdue on payments are contacted often.
Early contact and resolution of a customer’s concern about an invoice might increase the chance of timely payment collection. In a nutshell, you significantly improve the probability that all of your invoices will be paid on time by hiring Accounts Receivables outsourcing.
AR professionals understand how to collect customer payments without straining the relationship efficiently. However, frequently keeping the lines of communication open will help improve customer satisfaction with billing and payment processes, thus resulting in punctual payments down the road.
Access AR best practices
There is no one-size-fits-all ideal AR workflow. However, there are certain AR best practices that any business of your size and sector may utilize to save time and money.
A professional AR partner can be an essential ally by comparing your company’s AR processes to its competition, identifying the gaps, and providing you with the facts you need to make better judgments.
Here are some of the primary advantages that you may receive right away:
- An AR process assessment can help identify areas that may need improvement, such as how often the sales team overrides standard contract terms.
- Improved reconciliations of discrepancies in accounts.
- Develop reports that forecast future revenue and liquidity
Analyze how your credit policies are affecting your customers’ experiences. Are you taking too long to approve credit applications, is it true that you assess customer risk, and do you need to make any significant changes to your existing credit standards?
Streamline invoicing through automation
A seemingly straightforward invoice procedure may have bugs and anomalies that impact your cash flow.
Centralizing AR and automating most AR operations using electronic billing systems and customer portals are two ways to address errors in the generation of invoicing, data record inaccuracies, and charging customers outside the system.
Outsourcing Accounts Receivables allows you to experiment with the newest automation technology without purchasing it.
Automating your collection management processes will not only improve communication between departments, but also increase the transparency of financial reports. This, in turn, will give you a timelier response to strategic decisions.
Lower employee costs
There are many advantages when outsourcing the accounts receivable process, including reducing or eliminating the need for an in-house AR team. It will help you save money on overhead costs while also improving your cash flow.
You may rapidly expand your AR collection processes as your business expands without worrying about finding and training new employees in time to keep up with the growth.
A targeted approach to reducing DSO
You can negotiate a reduction in DSO as part of the business contract once you have hired an outsourced Accounts Receivables partner. This will result in more cash being available to fund core business functions.
In any case, you must consider the advantages of Accounts Receivables outsourcing alongside the associated dangers of AR outsourcing, as any severe company leader understands.
The most apparent one is the risk of transferring such a vital function to your firm to a third party, which will directly impact your company’s cash flow.
The chances of a data privacy breach can be avoided altogether when you collaborate with an outsourcing partner that is well-versed in the field. To ensure this, look for an AR service provider whose team has the skills, experience, and credentials needed to help your business reach its targets.