Top Strategies to Improve Accounts Receivable Collections: A Guide for AR Teams

For accounts receivable teams working with B2B transactions, managing collections is vital. Businesses often extend credit to customers, allowing them to pay later for goods or services. However, this can lead to delays or non-payment, which can hurt a company’s financial health.

Effective accounts receivable collection helps manage these risks. It involves following up on unpaid invoices to make sure customers pay on time. In this article, we’ll explain what accounts receivable collections are and share best practices to help collectors and AR teams improve their daily operations.

What is Accounts Receivable Collection?

Accounts receivable collections is the process of managing the money a business is owed by customers for goods or services provided but not yet paid for. This amount shows up as a balance on the company’s financial statement. It represents the total money customers owe to a business for purchases made on credit.

Teams in charge of accounts receivable are responsible for reaching out to customers with outstanding balances. Their tasks include negotiating payment terms and staying in touch with customers who may be behind on payments. In short, it’s all about making sure the business gets paid on time.

What is the Collection Process?

The accounts receivables collection process is how businesses handle and recover unpaid bills from customers. Here’s a simple overview of the usual steps:

1. Invoice Issuance: The business provides goods or services on credit and sends an invoice detailing the amount owed, payment plans, and due date.
2. Payment Reminder: Before the due date, the AR team sends reminders to encourage timely payment.
3. Due Date: The customer is expected to pay by this date.
4. Follow-Up Communication: If payment isn’t received, the collections team contacts the customer through reminders or phone calls.
5. Negotiation and Resolution: The team works with the customer to address any issues, possibly adjusting payment terms or resolving disputes.
6. Escalation: If payment is still not made, the process escalates. This might involve stronger communication or even legal action.
7. Payment Receipt: Once payment is received, the team confirms it and updates the records.
8. Documentation: All communications, negotiations, and transactions are recorded for future reference.

In the collection process, it’s important to communicate well, understand the customer’s situation, and find solutions that work for both sides. The aim is to get paid while keeping a good relationship with the customer.

Significance of Accounts Receivable Collections in Business Operations

Collecting accounts receivable is crucial for a company’s operations because it directly impacts cash flow, which is essential for daily business. This process involves getting payments from customers who owe money for goods or services they’ve bought on credit.

When a company collects these payments, it helps them meet their financial obligations. However, just having the money owed doesn’t count as income until it’s actually collected.

In financial reporting, the company’s accounting team tracks accounts receivable and collections on the balance sheet. Accounts receivable are first recorded as revenue and expenses. When the money is collected, it’s listed as an asset, showing the incoming cash and providing an accurate view of the company’s financial health.

How to Measure Accounts Receivable Collections?

Accounts receivable collections can be measured by:

Accounts Receivable Turnover Ratio (ART Ratio)

Businesses use the accounts receivable turnover ratio to measure how well they collect payments from customers. This ratio shows how quickly unpaid debts turn into cash. A higher ratio means the business collects payments efficiently, while a lower ratio suggests it’s less effective at collecting debts.

Days Sales Outstanding (DSO)

DSO (Days Sales Outstanding) shows how long it takes for a business to get paid after delivering products or services. A lower DSO means faster payments and better efficiency. It measures the average number of days it takes to collect accounts receivable within a specific accounting period.

How Can AR Teams Manage Accounts Receivable Collections?

Managing receivable collections is crucial for accounts receivable teams. To collect payments effectively, understanding and meeting customer needs is essential. The better you align with what your customers need, the more likely they are to pay early for your products or services.

Although managing collections can be complex, several strategies can make it easier. Setting a clear receivable policy, sending payment reminders, and creating clear invoices help smooth out the process. Using customer data and automated accounts receivable tools is also very effective. These tools help track, collect, and handle invoices quickly, reducing the risk of uncollected receivables and cash flow problems.

What are the Costs of Accounts Receivable Collections in Business?

Collecting overdue accounts can be expensive and time-consuming. However, it’s crucial for keeping cash flow healthy. A well-organized collections process can make the difference between a thriving business and a struggling one. Here’s some data from D&B:

• If an account is 90 days overdue, there’s a 69.6% chance it will be paid.
• If it’s 180 days overdue, the chance drops to 52.1%.
• After a year, the chance of getting paid falls to 22.8%.

Businesses may use collections agencies as a last resort to recover debts. These agencies charge high fees, typically between 25% and 45% of the amount owed, and only get paid if they successfully recover the debt.

7 Ways to Improve Accounts Receivable Collections

Smart Data Utilization

In today’s digital world, data is incredibly valuable. Having detailed customer information—like payment status, trends, and financial health—is key to successful collections. Accurate data helps you communicate clearly and avoid mistakes.

Using technology can centralize all your customer data into one place. This makes it easy to access individual records and sort information by payment status or purchase details when you’re following up on payments.

Flexible Payment Terms

To help customers who are struggling financially, think about changing payment terms to fit their situation. Offer early payment discounts for customers who pay on time. Also, offer a payment plan to customers who struggle to pay on time.

For example, extend the payment period from Net30 to Net45 or allow partial payments.

The goal is to make it easier for customers to pay early without hurting your relationship with them. Pressuring them for full payment right away could make things worse and isn’t good for your business.

Swift Invoicing

Sending invoices on time is crucial for getting paid quickly. It ties closely with other accounts receivable tasks like invoicing and cash application. To speed up collections, send invoices to customers as soon as possible and make sure they’re accurate—errors can cause delays.

Adding payment links to invoices can also help speed up the process and make it easier for customers to pay.

Proactive Payment Reminders

Invoices are often delayed because customers forget the due dates. Using strategies like sending reminder emails can help them remember to pay on time.

To make this easier, use a reminder automation tool. It can automatically send reminders to clients at set times, like a week before the invoice is due or 1-3 days before, through multiple channels.

 

 

Based on your relationship with the customer, industry standards, and location, you might make a friendly collection call. Also, dunning emails with payment links are often more effective for collecting payments.

Pursue Late Payments

Addressing overdue payments quickly is key to managing invoices and improving cash flow. By regularly communicating with customers and sending reminders, businesses stress the need to keep payment promises.

Following up on overdue payments shows professionalism and helps maintain financial stability. These actions build good customer relationships and reduce the chances of unpaid invoices.

Customer Experience Management

It’s important to never use threatening language when collecting payments from businesses. AR teams should communicate empathetically and politely with clients, understanding issues like cash flow problems or banking delays. This helps build positive relationships.

At the same time, AR teams need to address unreasonable excuses firmly but carefully, ensuring they don’t damage relationships or harm the company’s reputation.

Adapt Automated Solutions

Embracing automation is key to streamlining your accounts receivable collections. With automation software, AR teams can digitize and centralize their work. This helps in sending accurate invoices on time, automating reminders, and managing credit risk more effectively.

Automation makes teamwork easier and simplifies tasks like preparing invoices and generating aging report. It ensures consistency, reduces repetitive work, and lets the AR team focus on building customer relationships and analyzing customer behavior.

Closing Thoughts

Automated solutions are the most efficient way to ensure compliance, especially since handling paper invoices can be slow. Customers often struggle with finding the invoice, writing a check, and mailing it.

Peakflo’s Accounts Receivable Collection Automation makes this process much easier. Customers can pay invoices online from anywhere, anytime, without waiting for mail or making bank trips. This solution sets up a smooth accounts receivable system for your business.

With this solution, AR teams can:

• Create and send professional e-invoices, including tax, GST, recurring, and pro forma invoices, in seconds
• Set up reminders based on customer aging buckets
• Send multi-channel manual or automated payment reminders
• Track internal and external communication trails, capturing follow-ups, messages, questions, bounced messages, and open rates
• Escalate to the right stakeholders in the customer’s organization.
• Record promise-to-pay dates and amounts to simplify collections.
• Access all relevant customer data in one place
• Access pending tasks through a personalized “Actions” tab.