It’s not uncommon to find businesses without a proper accounts receivable (AR) management system. This can lead to serious financial problems down the road, so it’s important to have a system in place to manage your AR effectively. There are a few different ways to do this, but the most important thing is to make sure that all invoices are paid on time and that you have a clear understanding of your outstanding receivables at all times.
What Is Accounts Receivable Management?
Accounts receivable management is the process of collecting payments from customers who have purchased goods or services on credit. This can involve sending invoices, following up on late payments, and taking legal action if necessary. AR management is an important part of running a business, as it can impact your cash flow and bottom line.
Accounts receivable management is often undervalued by businesses, who mistakenly believe that they can get by without it or that using outdated technology is sufficient. This can lead to serious problems down the line, as businesses miss out on vital information and opportunities to improve their cash flow. Having a good AR management system in place is essential to keeping on top of your finances and ensuring that you do not get paid overdue.
What Does it Mean to Manage Accounts Receivable
Accounts receivable (AR) is the lifeline of a working capital management system for any business. AR financing is a type of short-term loan that allows businesses to borrow against the value of their outstanding invoices. This type of financing can be a great way to improve cash flow and manage working capital, as it can provide businesses with the funds they need to cover expenses and keep operations running smoothly.
Managing AR means having in place a system, policies, and procedures to streamline the accounts receivable. By doing so, businesses can improve their cash flow and reduce the risk of bad debt. An effective AR management system should include tools for tracking invoices, payments, and customer communications. It should also give businesses the ability to generate reports that can help them identify areas where they can improve their collections process.
We all know that liquidity is often more important for a business than profitability. This is because if a company doesn’t have enough cash to pay its bills, it will go out of business, even if it is making money. That’s why it’s so important for businesses to manage their cash flow carefully.
Accounts receivable directly impact a business’s liquidity. Yet, we see so many businesses undermining AR as a key metric for business growth. Poor management of accounts receivable can lead to cash flow problems and ultimately threaten the viability of the business. To ensure success, businesses must focus on optimizing their AR process to improve their liquidity position.
An effective accounts receivable management system means:
- Having in place effective policies and procedures
- Using the right technology for AR management
- Having a systematic approach towards collections
- Creating a strategy for delinquencies
- Communicating effectively within the organization and with the clients
Common Mistakes Companies Make When Managing Accounts Receivable
There are some common pitfalls that most businesses fall into when it comes to managing accounts receivable. For example, ignoring the AR management or deferring it until it becomes a nuisance can have serious consequences for the business. Not only can it lead to cash flow problems, but it can also damage relationships with good customers and suppliers.
Let’s look at the five most common errors:
Mistake #1: No AR Policy
Accounts receivable management is not a one-time task–it requires constant maintenance and intentionality. Without a system in place, it can be difficult to keep track of who owes what and when payments are due. This can lead to late payments, which can then negatively impact your business’s cash flow.
Despite this, many businesses do not articulate a formal AR policy. That means companies have no internal controls and unexplained procedures. As a result, employees may not be sure how to handle Accounts Receivable properly, leading to mistakes and inefficiencies. A formal Accounts Receivable policy gives employees clear guidance on how to handle receivables and can help improve AR management.
Mistake #2: Inefficient Technology
Going digital for modern businesses has become inevitable. However many companies are still using excel to manage their AR. This is because they lack the tools and infrastructure to make the switch. Additionally, going digital can be expensive and time-consuming. Therefore, many companies are hesitant to make the switch.
Some companies use accounting software to gain cash flow visibility, but lack a way to properly and effectively manage invoices. This can lead to inefficiencies and errors in the accounting process, which can ultimately impact the bottom line. Having a system in place to manage invoices effectively can help avoid these problems and improve overall cash flow management.
Mistake #3: Ineffective Communication
Another grave mistake firms make is that they fail to communicate clearly with both internal stakeholders and clients. This often leads to misunderstandings and can jeopardize the success of projects. Good communication is essential to maintaining strong relationships with both internal and external stakeholders.
This leads to uncertainty about what actions have been taken on which accounts and confuses the client. This chaos results in inefficient cash collections and bad customer service.
Mistake #4: Extending Credit to Unqualified Customers
A common mistake made by many businesses is to extend the credit facility to unqualified customers. This can lead to financial difficulties for the business, as the customer may not be able to repay the debt. It is important to carefully assess a potential customer’s ability to repay before extending credit.
Why did this mistake happen? Because they don’t know which customers are qualified because they lack data insights and visibility into client behavior. This not only affects the liquidity of the business, it deprives the qualified clients as well.
Mistake #5: Inaccurate Records
If a business lacks the technology and proper tools to generate invoices, errors and omissions are likely to occur. This can lead to customer dissatisfaction and financial losses for the company. Having an effective invoicing system in place is essential for any business that wants to run smoothly and avoid these potential problems.
These inaccuracies lead to customer disputes and constant back and forths that drag on the cash collection period. This ultimately leads to a decrease in customer satisfaction and an increase in operational costs.
Optimizing the Most Underrated Lever of Business Growth – Accounts Receivable
Optimizing the accounts receivable management revolves around two key aspects for any business.
Create An Accounts Receivable Policy
Formulating a formal AR policy will lead to clarity as you put in place effective internal controls and procedures. This will help ensure that your company’s assets are protected and that all financial transactions are properly recorded.
A clear policy on cash collection and client relationship management helps your business stay proactive. By having a clear understanding of when and how you will collect payments from clients, you can avoid misunderstandings and keep your relationships strong. Having a policy also helps you stay organized and efficient in your collections process.
Businesses are often reluctant to invest in AR management systems because they fail to see the value of having both accounting software and an AR management system. However, acquiring the right technology can improve revenues, reduce reliance on debts, and accelerate cash collection. It also makes life easier for your Account Owners.
Best Practices for Managing Accounts Receivable
Strategizing the accounts receivable management is the first step toward success. An effective action plan and best practices can ensure your accounts receivable management stays on top. Here are six best practices for managing accounts receivable.
Automate, Automate, Automate
Start using accounting and invoice software. There are many benefits to using accounting and invoice software for businesses. Perhaps the most obvious benefit is that it can save the business time and money. With accurate records of income and expenses, businesses can make more informed decisions about where to allocate their resources.
This can lead to increased efficiency and profitability. If you automate your invoices and billing reminders, you can speed up your cash collection, reduce errors, and improve client relationships. Automation can help you keep track of payments and follow up with clients quickly and easily.
Prioritize Credit Policy
Set up a clear credit policy. Do not extend the credit terms to unqualified clients just to increase sales because it will bite you in the long run. You also want to track credit limits and client credit behavior.
Accept Electronic Payments
Making it easy for clients to pay is important for businesses. By accepting various payment options, businesses can make it more convenient for customers to pay. This can help businesses attract and retain customers. Additionally, businesses can offer discounts or rewards for customers who pay on time.
You can start accepting invoices electronically. This removes any payment friction and helps you collect faster. Electronic invoicing is more efficient and cost-effective than traditional paper invoicing, so it’s a win-win for both you and your customers.
Engage your AR staff regularly on set policies and procedures to make sure your policies still make sense and that everyone understands what they are. Also, make sure your clients are getting the right information from your business. Clients should be able to reach you easily to ask questions, raise concerns, and understand their balances.
Track the KPIs
A pivotal task for AR staff is to use the right Key Performance Indicators (KPIs).
- Days in Sales Outstanding
- Average Receivable Days
- Cash Conversion Cycle
- Days in Delinquency
- Collection Effectiveness Index
Learn more about key metrics here : (Link to AR article)
Outsource Delinquent Account Collections
Delinquent accounts are those where the customer has not paid within the specified time frame. This is usually 30, 60 or 90 days. Many businesses will have some delinquent accounts, but it is important to manage them carefully to minimize the impact on cash flow. There are a number of ways to do this, including working with customers to establish payment plans, using collection agencies, or taking legal action.
At this stage, it’s wise to outsource the invoices to collection agencies that specialize in the task. This will help ensure that the invoices are collected in a timely and efficient manner. The agencies will also have the necessary tools and resources to pursue legal action if necessary.
How Peakflo Can Help
Realizing the importance of AR management is the first step in the right direction. You can then formulate a comprehensive AR policy and set procedures accordingly. This will help ensure that your company is able to effectively manage its accounts receivable and avoid any potential issues that could arise.
You may need to arrange the right tools for your AR department. It’s worth investing in a system that will keep your cash flows flowing. The right tools can make all the difference in terms of efficiency and effectiveness, so it’s important to take the time to choose wisely.
Peakflo increases transparency and gives you full visibility into your accounts receivable status. With Peakflo, you can see exactly how much money is owed to you, who owes it, and when it is due. This information is updated in real-time, so you can always be sure that you’re getting the most accurate picture of your finances.
The comprehensive tool streamlines collections by:
- Automating payment reminders with workflows
- Providing credit limit overviews with the Credit Control Report
- Enabling customer electronic payments with the Customer Portal
- Tracking relevant metrics on our dashboard
- Pursuing delinquent accounts by issuing Letters of Demand on your behalf