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
Prompt Invoice Submission
A sales or service invoice is a crucial document that formalizes customer payment requests. Avoid future disagreements by issuing a formal invoice instead of relying on oral agreements. Boosting payment turnaround time is vital, so you should deliver invoices promptly within 2-days of completion or delivery. Sending invoices quickly keeps the service or product top of mind, encouraging customers to pay on time. Optimize your payment cycles: submit invoices without delay.
Implement Late Payment Fees
Incentivize timely payments by implementing a late payment fee, such as a 1.5% interest on outstanding balances. As a gesture of goodwill, disregard late fees for first-time offenders. However, ensure customers know this leniency is a one-time occurrence and late fees will not be waived for subsequent late payments.
Attract Customers To Pay Early By Offering Discounts
It’s no secret that businesses aim to minimize expenses for goods and services. Encourage your clients to make payments beforehand by providing early payment discounts. For example, you can include “3/10 n/30” terms on your invoices, allowing customers who pay within ten days to receive a 3% discount. The entire invoice amount is due within 30 days; otherwise.
While it may only persuade some consumers, some will surely take advantage of the offer. To enhance the effectiveness of your Accounts Receivables collections process, streamline it and set up an automated Accounts Receivable system to avoid cash flow issues.
Initiate Debt Collection
If customers are unwilling to adhere to payment terms, engage a legal professional to issue a final letter notifying them of your intention to initiate debt collection proceedings. This may incur additional expenses. Alternatively, writing off the outstanding debt as a business deduction may be possible, thereby avoiding further costs.
Separating Duties Accounts Receivable Management
For effective management of Accounts Receivable, you should divide responsibilities. Assign invoicing duties to one person, have another receive payments, and reconcile them with outstanding invoices. Without multiple personnel, owners of small companies should review all incoming payments for accuracy before passing them on to the bookkeeper. This will streamline accounts receivable management and mitigate any potential errors.
Enhance Your Business’s Efficiency With Accounts Receivable Monitoring
Track your Accounts Receivable turnover ratio to measure your business’s ability to collect Accounts Receivable promptly. A higher turnover ratio reflects improved performance. As you implement new policies and procedures, monitoring how the turnover ratio changes over time is crucial. Keep tabs on your Accounts Receivable turnover to enhance your business’s efficiency.
Enhance Your Invoices with Personalized Branding
Incorporating company colors and designs into your invoices add aesthetic value, strengthens brand recognition, and encourages prompt payment. Set yourself apart from the competition with unique and memorable invoices that reflect your brand identity.
Implement a Professional Credit Policy And Process
A credit policy serves as a safeguard for your business against clients who fail to pay on time. It entails a rigorous and structured screening procedure before offering credit to customers. Establishing precise requirements, terms, and conditions ensures the identification of reliable debtor candidates. A firm credit policy is an efficient way to develop financial stability and grow your business.
While it’s tempting to increase profits by overextending credit, having a well-defined process in place is essential. This process should outline guidelines for evaluating credit limits, implementing account freezes, and making credit decisions. Additionally, it should be regularly reviewed and updated to account for changing circumstances. Establishing a concise and practical credit approval process can help safeguard your business against financial risks.
Prompt Action Required When Customers Miss a Payment Deadline
While it’s essential to extend understanding to customers who miss payment deadlines, remaining proactive is vital. Regularly generate an aging Accounts Receivable report to stay on top of upcoming and overdue invoices. You should conduct this at least once a week to maintain ample oversight.
Promptly address any past-due accounts by reaching out to customers directly. Resolving missed payments promptly can alleviate the discomfort of collecting from slow-paying customers. If initial attempts fail, consider sending a collection letter by email within 2-days, as the customer prefers.
Ensure The Consistent Accuracy Of Customer Data
Accurate customer data is essential for a successful Accounts Receivable process. To ensure this accuracy, utilizing a centralized data controller is recommended. This allows for consistent checks of account records, preventing errors such as mailing invoices to the wrong address and avoiding late payments.
Regular updates to customer data and establishing strict access controls mitigate risks of unauthorized changes. By prioritizing the accuracy of customer data, businesses can safeguard their financial operations and keep processes running smoothly.
Practical Strategies to Tackle Customer Concerns and Timely Payments
Customer dissatisfaction remains a crucial reason for delayed payments. It’s imperative to have a robust mechanism that immediately addresses customer concerns by connecting them to the right individual. Avoid directing them to the Accounts Receivable clerk, who may not have the required resources and knowledge. Prompt resolution of customer grievances is crucial to avoid collection issues.
Provide Easy Payment Options To Customers
Customers can save time and convenience by paying their invoices electronically through ACH or credit cards. With the option of paying using a mobile device, payments can be made swiftly and hassle-free. Say goodbye to the delays of traditional check payments.
Ensure Accurate Receivable Aging Reports by Promptly Applying for Customer Payments
To maintain accurate and up-to-date Receivable Aging reports, it is essential to apply customer payments to the appropriate invoices in the accounting records as soon as possible. This practice ensures that management can access reliable financial data when making critical business decisions.
Effective Strategies for Forecasting Recurring Revenue
Businesses that offer services monthly, quarterly, or annually must establish unique accounting techniques to forecast and schedule future invoicing. Using forecasting tools, accountants can compare recurring expenses to monthly invoicing trends and identify missed clients. For streamlined billing, consider automating the process and sending out bills on the same day each month to prevent unexpected delays. Adopting these practices can significantly enhance the accuracy and efficiency of revenue forecasting.
Streamline Your Invoicing Process with Dedicated Software
Say goodbye to manual invoice creation and tracking. Invoice software makes the invoicing process a breeze, enabling you to create, send, and monitor invoices quickly and efficiently. Automating these tasks can reduce your workload, freeing time to focus on more critical business tasks.
Leverage the power of integrated software to optimize your invoice payment tracking. This requires ensuring that the software used to track Accounts Receivable payments is in sync with the one that records bank deposits and reconciles bank accounts. This ensures consistency and accuracy between the Accounts Receivable payments received and the checks deposited in your bank account.
Streamline your invoicing process with a cloud-based system. Cut down on manual tasks and enjoy automatized reminders for overdue payments while providing your customers with electronic alerts. You have recurring invoices automatically sent and communicated with clients to negotiate pricing and terms. Invest in an efficient accounting system that saves you time and effort.
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.