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.
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.
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.
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.
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.
5. Incorporate Automate Workflow
Embrace digital transformation in accounts receivable workflow through automation. Experience increased efficiency, reduced errors, and the ability to monitor invoicing and collections effectively. Automated workflows allow accounts receivable teams to focus on strategic tasks, fostering business growth.
With Peakflo’s Task Management module accounts receivable teams can achieve 10x productivity by incorporating actionable and customizable workflows in their day-to-day operations. It allows you to create, manage, and execute all your pending tasks in one place.
How to Choose the Right Accounts Receivable Management Automation Solution?
By embracing automation, organizations not only enhance ROI but also prioritize delivering improved customer experiences. Therefore, choosing the right solution for accounts receivable management is crucial.
Listed below are a few things to consider when evaluating an accounts receivable solution:
- Evaluate the system’s capability for generating clear and timely invoices and statements.
- Check how the solution facilitates payment processes for both you and your customers.
- Assess the system’s effectiveness in monitoring and managing overdue payments.
- Look into features that address deductions and help manage disputes efficiently.
- Examine the solution’s ability to provide insights through customer-related data analysis.
- Evaluate how the system handles the application of cash to outstanding invoices.
- Consider features that enhance collaboration and communication within the system.
- Assess how the solution contributes to a positive overall customer experience.
- Look for user-friendly features that encourage easy adoption by your team and customers.
- Consider the availability and quality of support provided by the solution provider.
- Prioritize solutions with robust security measures to protect sensitive financial data.
- Evaluate the overall cost of the solution and its alignment with your budgetary considerations.
Peakflo’s cloud-based accounts receivable solution elevates accounts receivable management by offering increased flexibility, efficiency, scalability, and an enhanced customer experience. Leveraging the solution allows AR teams seamless accessibility, streamlined processes, and the ability to adapt to evolving business needs, ultimately optimizing the entire accounts receivable process.
FAQ
The primary objective of managing accounts receivable is to ensure timely collection of payments from customers for goods or services provided on credit, helping maintain a healthy cash flow.
The key focus in managing accounts receivable effectively is promptly collecting payments from customers to maintain a positive cash flow. Effective communication and customer relations are also crucial for a smooth process.
Accounts receivable management involves practices, procedures, and policies used by a company to handle the money owed by customers. This includes creating invoices, tracking payments, setting up reminders, and using strategies to encourage timely payments.
The five steps in effectively managing accounts receivable are: establishing credit practices, sending invoices promptly, monitoring receivables regularly, maintaining proactive communication with customers, and utilizing accounting software and automation tools.
The three main types of receivables are accounts receivable, notes receivable, and other receivables. Accounts receivable are amounts owed by customers for goods or services purchased on credit. Notes receivable are confirmed debts in writing, and other receivables include non-trade receivables like interest, tax refunds, and insurance claims.
