Maintaining healthy cash flow is key to a successful business, and the accounts receivable process plays a big role in this. Managing accounts receivable well keeps money coming in and builds good relationships with customers and partners.
In today’s fast-moving business world, optimizing accounts receivable is more important than ever. This blog offers a straightforward guide for CFOs and other top executives to improve their accounts receivable process with best practices.
Best Practices to Improve Accounts Receivable
The accounts receivable process includes several key steps. It starts with checking customer credit to decide their credit limit. After setting credit terms, businesses issue accurate and timely invoices. They then monitor customer accounts to ensure payments are made on time.
When payments come in, they are carefully matched with invoices to check for errors. Any issues are quickly resolved. Finally, payments are applied to the correct invoices. This helps keep cash flow healthy and finances stable.
Let’s take a look at how we can implement accounts receivable best practices in each step:
Improve Credit Management
1. Check the Creditworthiness of Customers
Review creditworthiness before giving credit to new or existing customers. Check their credit history, payment habits, and financial health. For new customers, consider these 5 key factors:
- Character: Determined by a customer’s credit history.
- Capacity: The ability of the customer to repay their debt.
- Capital: The total assets owned by a company.
- Collateral: The assets that a customer commits to back a line of credit.
- Conditions: Market analysis of a company based on geo-political situations.
2. Set Credit Policies
Having clear and transparent credit policies is a best practice in accounts receivable. Clearly state credit terms, payment deadlines, and any fees or interest rates. Make sure your customers understand these terms well.
Companies often set clear credit policies to determine which customers can get extended payment terms and which must pay in full right away. With a clear policy, employees can confidently follow guidelines when denying credit. Customers who don’t qualify will understand the decision better, leading to a fairer and more straightforward credit process.
3. Assess Credit Risk
Set credit limits by carefully evaluating each customer’s credit risk and credit bureau reports. Adjust limits based on their financial strength and payment history to reduce the risk of non-payment. To determine the right credit limits, follow these steps:Set appropriate credit limits based on a thorough assessment of credit risk and of each customer. Tailor credit limits to match the financial capacity and payment history of the customer, minimizing the risk of defaults. To set the right credit limits for customers, consider these calculations:
- Net Worth Calculation: Start by offering credit up to 10% of the customer’s net worth.
- Trade Reference Calculation: Use the average credit limits from other companies that have worked with the customer.
- Needs-Based Calculation: Adjust the credit limit based on the customer’s requested terms.Regularly review and adjust credit limits based on the customer’s financial situation and payment history.
Once you set a credit limit, don’t treat it as permanent. Keep an eye on the customer and adjust the limit as needed based on their current situation and your interactions with them.
Improve Invoice Management
1. Establish a Company-Wide Invoice Guideline
Creating a clear and consistent invoice process guideline is a best practice for accounts receivable that everyone in your company should follow. The invoice process should include:
- Invoicing Dates and Periods: Set clear invoicing periods and dates to create a predictable schedule for both your company and your customers.
- Information on Invoices: Specify what details need to be included on each invoice, such as:
- Purchase Order numbers
- Company contact information
- Customer details
- Payment details and terms
Keeping invoice content consistent helps streamline communication and avoid mistakes.
- Recordkeeping Procedures: Outline how to keep records of invoices. Establish a method to organize and store invoice information so it’s easy to find and reference.
2. Automate Invoice Generation and Delivery
Switching from paper invoices to automated systems is a major step towards efficiency. Automation cuts down on manual work and helps the environment.
By using automated invoicing, businesses can speed up the process, reduce errors, and accelerate the entire invoicing cycle. Electronic invoices, seamlessly generated and delivered, enhance precision, speed, and accessibility.
This modern approach not only boosts productivity and saves costs but also supports sustainability goals. It’s a smart move that makes financial operations faster and more advanced.
3. Track Invoice Delivery Status
Get clear insights into your invoicing with an Invoice Status Tracking Report. This tool shows key details like delivery time, open rates, and click rates. Track each invoice’s progress, ensure timely delivery, and see how recipients engage with your invoices.
Using this report helps businesses manage their invoicing better by spotting any bottlenecks and improving communication. It makes the invoicing process smoother and supports better financial management with real-time data.
Improve Dispute Management
1. Instill Communication Channels
Set up clear ways to handle disputes. Encourage customers to share their concerns quickly and keep the conversation open. Replying fast shows you’re committed to solving the issue, builds trust, and keeps relationships strong. Having a dedicated contact person and easy-to-use communication tools makes managing disputes easier.
2. Document Everything
Good documentation is crucial for resolving disputes. Keep audit trail of all transactions, agreements, and communications. This helps you track the situation and provides clear evidence for understanding and resolving the issue. Accurate records are key to making a strong, fair case and settling disputes quickly.
3. Offer a Platform to Raise Dispute
Give your customers a platform to raise invoice disputes easily by choosing from a list of reasons tailored to your business. This helps them explain their issues clearly. When a dispute is raised, the right people are notified by email immediately. This practice makes managing disputes smoother and shows you’re committed to addressing customer concerns effectively.
Improve Collections Management
1. Offer Multiple Payment Options
Simplify the payment process for your clients to enhance overall satisfaction and expedite collections. Implement user-friendly payment portals, offering diverse B2B payment options to accommodate varying preferences. By minimizing friction in the payment experience, you encourage prompt settlements and foster positive client relationships, ultimately contributing to a more efficient accounts receivable process.
2. Strategize Collection Outreach as per Aging Bucket
Improve your collection strategy by organizing your outreach based on aging reports. Prioritize communications according to the outstanding duration, addressing more urgent matters first.
Use multiple channels to remind people to pay, like email, text messages, phone calls, and WhatsApp. This increases the chance your message will get through. This method helps you target your efforts where they’re needed most, improving the chances of getting paid on time and reducing the risk of long delays.
3. Streamline Collection Workflow
One of the accounts receivable best practices is to enhance efficiency in your collection processes by streamlining workflows. From invoice generation to follow-up communications, identify and eliminate bottlenecks. Leverage automation tools to schedule payment reminders, escalations, and status updates. Streamlining the collection workflow not only saves time but also reduces the likelihood of errors, allowing your team to focus on strategic, high-impact tasks, and fostering a more agile and responsive collections process.
Automate Reconciliation Process
Upgrade your reconciliation process with a modern Accounts Receivable solution. This technology speeds up matching financial transactions and ensures accuracy. Automated features quickly spot and fix errors, reducing manual work and saving time. It works well with your current systems, offering real-time updates and useful insights.
By using this technology, businesses gain better financial visibility, improve decision-making, and strengthen their financial health for long-term success.
Track Key Accounts Receivable Metrics
Efficiently managing accounts receivable involves continual optimization through the monitoring of key performance indicators. Keep a vigilant eye on metrics such as:
- Days Sales Outstanding (DSO): Reflecting the average time for payment collection.
- Average Days Delinquent (ADD): Gauge the average overdue period for customer payments.
- Accounts Receivable Turnover (ART) ratio: Measures how often customers settle invoices within a set timeframe.
- Collections Effectiveness Index (CEI): Indicates the percentage of revenue collected.
Consistent improvement in these metrics contributes to a more robust cash flow, fortifying your business’s financial stability over time.
Few More Accounts Receivable Best Practices
- Train all AR staff on the best practices for managing receivables. This training should cover how to handle disputes, collections, and credit policies to ensure everyone understands the procedures and policies clearly.
- Make sure customer information is correct and up-to-date to keep your accounts receivable process running smoothly. Keep a central database of customer details and check it regularly for accuracy.
- Regularly check your AR processes to find areas that need improvement. This means reviewing invoices for errors, looking for delays in payment processing, and making sure you follow your company’s policies.
- Simplify AR workflows by reviewing and optimizing existing processes. Streamlining workflows reduces errors, enhances decision-making, and improves overall efficiency in managing accounts receivable.
- Inter-team communication is key for working together on problems and staying on track with accounts receivable goals. Create an environment where everyone can easily share information, updates, and ideas.
- Intra-team communication is crucial for the smooth flow of tasks and for maintaining a shared understanding of individual responsibilities. Implement regular check-ins, status updates, and collaborative platforms to facilitate efficient communication.
Closing Thoughts
Adopting these accounts receivable best practices is essential for CFOs steering the financial course of their organizations. Establishing robust credit policies, simplifying payment processes, and vigilant monitoring of past-due accounts collectively empower CFOs to minimize late payments and cultivate a healthier cash flow. Strategic tracking of KPIs provides the insights needed for informed decision-making, optimizing receivable management, and fortifying the financial foundation.
Leveraging Peakflo’s Accounts Receivable solution further ensures that CFOs stay on top of process health by providing a comprehensive and efficient tool for sustained financial stability and strategic growth.
FAQ
The four main functions of accounts receivable are:
a. Extending trade credit to customers.
b. Keeping records of money owed by customers.
c. Enabling collections of payments.
d. Posting cash payments.
Additionally, accounts receivable departments may also reconcile customer accounts and prepare aging reports to identify overdue payments.
The standard for accounts receivable according to Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) is that the accounts receivable balance should reflect the net realizable value. This means the amount of cash a business expects to collect from its customers.
The accounts receivable balance is the total amount of money that a company is owed by its customers for goods or services that have been provided but not yet paid for. It includes all outstanding invoices and bills that are waiting for payment.
An accounts receivable aging report is a document that lists unpaid invoices from customers, showing how long they have been outstanding. It helps track overdue payments and manage collections by categorizing invoices based on the length of time they have been unpaid.
