HomeAccount ReceivableAccounts Receivable Management: The Ultimate Guide for AR Teams

Accounts Receivable Management: The Ultimate Guide for AR Teams

In the B2B world, credit plays a crucial role in sustaining business operations. Many customers routinely make purchases on credit terms, forming a vital financial arrangement. When a supplier completes an order, the customer is required to pay the bill within a certain deadline. This is where accounts receivable management comes in. For accounts receivable teams effectively managing accounts receivable is not just important; it’s vital to ensure timely invoicing and payments. 

Good accounts receivable management policies can enhance cash flow, streamline collection processes, and expedite payment from customers. They can also significantly improve the overall customer experience. On the other hand, poor practices can affect organizational growth.

Many accounts receivable teams still rely on paper-based processes and legacy systems. Meanwhile, teams that embrace digitization and automation in accounts receivable management are outpacing competitors.

Before transitioning processes online and automating tasks, it’s crucial to understand your organization’s entire accounts receivable process. This understanding helps identify areas for improvement.

This blog will delve into the accounts receivable management process, addressing challenges, presenting best practices, and offering strategies for accounts receivable teams to choose the right solution.

What is Accounts Receivable Management?

Accounts receivable management refers to the systematic and strategic process of handling a company’s outstanding customer invoices and ensuring the timely receipt of payments. It involves overseeing and regulating the money that customers owe a business for goods or services bought on credit. Moreover, accounts receivable management includes implementing policies and procedures to reduce the risk of bad debts and write-offs.

The key responsibilities of accounts receivable teams in managing accounts receivable include:

Credit Terms: Establishing and managing credit terms, which outline the duration within which customers are expected to settle their bills.

Invoicing: Generating and sending invoices promptly and accurately to customers for the goods or services provided.

Follow-Up and Collections: Monitoring overdue payments and implementing a systematic approach to follow up with customers to collect outstanding amounts. This may involve phone calls, emails, or other communication channels.

Cash Application: Efficiently applying received payments to outstanding invoices, ensuring accuracy and timely reconciliation of accounts receivable records. The cash application process involves matching payments to invoices, resolving discrepancies, and updating records accordingly.

Monitoring Credit Risk: Keeping a close eye on customer credit limits and credit scores from time to time to prevent potential risks associated with excessive credit exposure.

Analysis and Reporting: Regularly analyzing accounts receivable data to identify trends, assess the effectiveness of credit policies, and make informed decisions to improve the overall process.

What are the Metrics Used for Accounts Receivable Management?

Metrics play a crucial role in effective accounts receivable management. Accounts receivable teams need to measure different KPIs of accounts receivable to take action and assess the effectiveness. Some commonly used metrics are:

Receivables Turnover Ratio: The metric measures sales as a percentage of accounts receivable. A higher ratio indicates a more successful collection of payments, reflecting positively on the business.

Days-Sales-Outstanding (DSO): Calculated by dividing the average accounts receivables by sales and then multiplying by 365, DSO reveals how long it takes for a company to convert its receivables into cash.

Collection Efficiency Index (CEI): The CEI metric assesses the effectiveness of collecting payments by evaluating the ratio of actual collections to the total outstanding receivables. A higher CEI signifies a more efficient collection process, reflecting positively on the business’s ability to convert outstanding receivables into cash.

Accounts Receivable Aging (AR Aging): This report categorizes accounts receivable by the length of time they have been outstanding. It helps identify overdue accounts and allows for targeted collection efforts.

Average Collection Period: This metric indicates the average number of days it takes for a company to collect payments from its customers. It is calculated by dividing the average accounts receivable by the average daily sales. A lower average collection period is generally favorable as it indicates a faster collection of receivables.

AI pwered reports


What are the Goals of Accounts Receivable Management?

The fundamental objectives of accounts receivable management are as follows:

Cash Flow Management

Ensuring the timely collection of receivables is crucial for maintaining a healthy cash flow. The speed at which payments are received directly impacts a company’s ability to meet ongoing business needs.

Customer Relations

The way accounts receivables are handled can significantly influence customer relations. Continuous follow-ups on overdue payments or delayed invoicing can lead to customer frustration. It’s essential to strike a balance to maintain positive relationships.

Bank Reconciliation

Efficiently managing various remittance formats, including addressing missing remittances, is part of bank reconciliation. Without an organized system, the accounts receivable team may spend considerable time sorting and applying payments, risking errors.

Improved Billing & Invoicing

Streamlining invoicing processes helps prevent errors and ensures timely delivery of invoices to customers. Utilizing tools for easy invoice sending and facilitating direct payments, along with providing various payment options, enhances customer convenience and accelerates the accounts receivable process.

Resolving Deductions

In cases of disputes, the accounts receivable team should clarify each item to the customer and propose alternative solutions, such as payment plans. Communicating payment terms to vendors before invoicing allows them to address concerns in advance. Having a procedure to resolve disputed invoices contributes to customer satisfaction and increases the likelihood of receiving payments.

These objectives collectively aim to enhance financial stability, customer satisfaction, and the overall efficiency of accounts receivable management.

What are the Roadblocks in Accounts Receivable Management?

Contrary to what is commonly perceived, issues such as late payments or high DSO are not the root problems but rather outcomes of poor AR management practices.

Here are the root causes to tackle in accounts receivable management:

Lack of Communication 

One major hurdle is the lack of effective communication between the accounts receivable team and customers. This disconnect often stems from insufficient transparency into receivables, reliance on manual workflows, and ineffective communication methods. Examples include sending invoices without proper documentation or to the wrong contact, leading to issues like lost checks or incomplete payments. This not only adds more workload for AR teams but also creates a negative customer experience, sometimes even resulting in legal disputes.

Inefficient Traditional Processes 

Traditional accounts receivable management processes are inherently inefficient, relying heavily on manual efforts. This can result in errors such as inaccurate data entry, delayed invoicing, miscommunications, late payments, and ineffective follow-ups. The use of individual phone and email outreach or physical mailing of paper checks and invoices can slow down the entire collection process.

Lack of Data Visibility

Many accounts receivable teams face difficulties in accessing and evaluating data in real time. The use of various legacy systems, reports, spreadsheets, and tools makes it challenging to retrieve information swiftly. This lack of real-time metrics prevents AR teams from providing timely advice to the sales department on credit terms, updating the collections team on outstanding accounts, and accurately forecasting customer payment issues due to a lack of historical data.

accounts receivable automation


5 Best Practices to Improve Accounts Receivable Management

1. Ensure Timely Invoicing

Creating, delivering, and tracking invoices is the key to getting paid faster. Ensure invoices are sent timely and align with agreed payment terms. Maintain a clear, concise, and polite tone in both invoice content and emails. Include all necessary details such as payment terms, due date, and payment method for a smooth payment process.

Peakflo’s Invoice module allows you to create and send professional invoices automatically with customizable line items, discounts, and tax rates. It also allows accounts receivable teams to track invoice delivery status and open rates in real time.

accounts receivable management automation

2. Enable Multiple Payment Options

Provide multiple payment options such as credit cards, debit cards, ACH, eChecks, and virtual bank accounts for customer convenience. Offering diverse payment methods eliminates disruptions to customers’ routines, making it easier for them to fulfill payment obligations.

Peakflo’s Payment module allows local or international customers to choose between multiple payment methods including bank, eWallet, or card for a seamless payment experience.

accounts receivable management automation

3. Provide Clear Communication

Prioritize clear communication for optimized collections and a positive customer experience. Set and communicate clear payment expectations in writing. Provide accessible contact information for inquiries. Use accounts receivable software for streamlined communication and shared access to important details.

Instead of having no visibility over customers’ questions, disputes, and file submissions, centralize all the communications for your customers with Peakflo’s Customer Portal. It allows accounts receivable teams to stay on top of customer communication and answer their queries instantly.

4. Utilize Collections Follow-Up Strategy

Implementing a robust collections follow-up strategy is essential for optimizing accounts receivable management. A well-rounded approach, combining collection calls, dunning, and multi-channel payment reminders, proves to be key. This strategy ensures timely and effective communication, encouraging prompt payments and enhancing overall AR efficiency.