Maintaining a healthy cash flow is undeniably the heartbeat of any successful business. One of the critical components that directly influences this is the accounts receivable process. Efficient management of accounts receivable not only ensures a steady influx of capital but also fosters strong relationships with customers and partners.
In today’s dynamic business landscape, where agility and adaptability are paramount, optimizing your accounts receivable process is more crucial than ever. This blog serves as a compass for Chief Financial Officers and other C-suite executives, providing a comprehensive guide to elevate the process with accounts receivable best practices.
Best Practices to Improve Accounts Receivable
The accounts receivable process encompasses several key steps. It begins with a meticulous customer credit check to assess creditworthiness, allowing businesses to set appropriate credit limits. Once credit terms are established, the process moves to invoicing, where accurate and timely invoices are issued. After invoicing, diligent monitoring of customer accounts ensures adherence to payment timelines. As payments are received, they undergo thorough reconciliation to match invoices with received payments. Any discrepancies are promptly addressed. The final step involves the systematic application of payments to outstanding invoices, ensuring a streamlined and transparent accounts receivable process that contributes to healthy cash flow and sustained financial stability.
Let’s take a look at how we can implement accounts receivable best practices in each step:
Improve Credit Management
Check the Creditworthiness of Customers
Conduct comprehensive credit checks on new and existing customers before extending credit. Assess their creditworthiness by reviewing their financial history, payment patterns, and overall financial health. To assess the creditworthiness of a new customer keep in mind the 5C’s of credit:
- 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.
Set Credit Policies
Establishing clear and transparent credit policies is another accounts receivable best practice. Communicate credit terms, payment terms, and any applicable fees or interest rates. Ensure that your customers fully understand the terms and conditions of credit.
Companies often create clear credit policies that outline which customers qualify for extended payment terms and which must pay in full immediately. With a transparent policy in place, employees can confidently adhere to guidelines when denying credit to certain customers. Simultaneously, customers who may not meet credit criteria won’t perceive the decision as unfair, fostering a more straightforward and equitable credit management process.
Assess Credit Risk
Set appropriate credit limits based on a thorough assessment of credit risk and credit bureau reports 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: A good rule of thumb is to limit your initial credit offer to 10% of the customer’s net worth.
- Trade Reference Calculation: Calculate the median credit limit based on the credit limits offered by other companies to the customer.
- Needs-Based Calculation: This calculation benefits customers by determining a credit limit aligned with their requested terms.
After setting a credit limit, avoid treating it as immutable; instead, regularly monitor the customer and, in response to evolving conditions and ongoing interactions, make necessary adjustments to the limit.
Improve Invoice Management
Establish a Company-Wide Invoice Guideline
Creating a straightforward and consistent invoice process guideline is an accounts receivable best practice that needs to be followed by everyone within your company. The invoice process should include:
- Invoicing Dates and Periods: Clearly define invoicing periods and set specific invoicing dates. This ensures a predictable schedule for both your company and customers.
- Information on Invoices: Specify what details must be included on each invoice, such as,
- Purchase Order numbers
- Company contact information
- Customer details
- Payment details and terms
Consistency in invoice content streamlines communication and reduces potential errors.
- Recordkeeping Procedures: Document how to maintain records related to invoicing. Establish a systematic approach to organize and store invoice information for easy retrieval and reference.
Automate Invoice Generation and Delivery
Ditching traditional paper-based invoice methods and embracing automation in invoice generation and delivery is a transformative leap toward efficiency. Automating this process not only reduces environmental impact but also slashes time-consuming manual tasks.
By leveraging automated systems, businesses streamline invoicing, minimize errors, and accelerate the entire invoicing cycle. Electronic invoices, seamlessly generated and delivered, enhance precision, speed, and accessibility. Embracing automation not only modernizes your financial operations but also positions your organization for increased productivity and cost savings. It’s an accounts receivable best practice that not only aligns with sustainability goals but propels businesses into a more agile and technologically advanced future.
Track Invoice Delivery Status
Gain comprehensive insights into your invoicing process with an Invoice Status Tracking Report. This dynamic tool provides visibility into crucial metrics, including delivery time, open rates, and click rates. Monitor the journey of each invoice, ensuring timely deliveries and tracking recipient engagement.
By leveraging this report, businesses can proactively manage their invoicing lifecycle, identifying potential bottlenecks and optimizing communication strategies. This data-driven approach enhances efficiency and empowers decision-makers with real-time information, fostering a streamlined invoicing process and bolstering overall financial management.
Improve Dispute Management
Instill Communication Channels
Establish transparent communication channels for dispute resolution. Encourage customers to convey concerns promptly, ensuring a swift and open dialogue. Responding promptly to disputes demonstrates a commitment to resolution, fostering trust, and preserving valuable relationships. A dedicated point of contact and accessible communication platforms contribute to a smoother dispute management process.
Thorough documentation is pivotal in dispute resolution. Maintain detailed records of all transactions, agreements, and communication. This not only serves as a reference point but also provides a clear audit trail for understanding the context of the dispute. Accurate documentation is invaluable in presenting a well-informed and substantiated response, facilitating a fair and efficient resolution process.
Offer a Platform to Raise Dispute
Empower customers by offering a platform where they can access customizable dispute reasons features, allowing them to raise concerns against specific invoices. By providing a menu of dispute reasons tailored to your business, customers can articulate their concerns more precisely. This accounts receivable best practice encourages open communication and ensures that the right stakeholders are notified instantly via email based on the dispute reason selected. This proactive approach not only streamlines the dispute management process but also demonstrates a commitment to understanding and addressing customer concerns with a personalized touch.
Improve Collections Management
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.
Strategize Collection Outreach as per Aging Bucket
Optimize your collection strategy by categorizing outreach efforts based on aging reports. Prioritize communications according to the outstanding duration, addressing more urgent matters first. Moreover, utilize multiple communication channels to send payment reminders, such as email, text messages, phone calls, and WhatsApp to increase the likelihood of your message reaching them effectively. This strategic approach ensures targeted efforts where they are most needed, maximizing the likelihood of timely payments and minimizing the risk of extended delays.
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
Revolutionize your reconciliation process by embracing an advanced Accounts Receivable solution. This transformative technology not only expedites the matching of financial transactions but also ensures accuracy and transparency in your reconciliation efforts. With automated reconciliation features, discrepancies are swiftly identified and rectified, minimizing manual errors and saving valuable time. These solutions seamlessly integrate with your existing systems, providing real-time updates and actionable insights. By improving the reconciliation process through technology, businesses can unlock greater financial visibility, enhance decision-making capabilities, and ultimately fortify their financial foundation for sustained growth and 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 in the organization on accounts receivable best practices to ensure a clear understanding of policies and procedures. The training should cover handling disputes, collections, and credit policies.
- Ensure customer information is accurate and up-to-date to facilitate an effective accounts receivable process. Maintain a centralized customer database and regularly audit it for accuracy.
- Regularly review AR processes to pinpoint areas for improvement. This includes checking invoices for errors, identifying payment processing bottlenecks, and ensuring compliance with established 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 vital for collaborative problem-solving and ensuring everyone is aligned with overarching AR goals. Foster an environment where teams can easily exchange information, updates, and insights.
- 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.
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.