The accounts receivable process are complex. It may require adjustments to keep up with the increased volume. It will happen as a business grows. Credit management experts can stay up-to-date on the latest best practices. It can be done by regularly searching for new accounts receivable process improvement ideas.
Whether you’re looking to optimize an existing system or learning to improve AR management for the first time, you’ve come to the right place. This article will provide ten essential steps to optimize the receivable process of accounts.
AR Management
Accounts receivable (AR) includes all the funds clients owe you for your services. This can be caught on your balance sheet beneath your present assets. Any modifications you create to your AR processes should address four goals. It involves:
- Improve Processing Efficiency
- Minimize Bad Debt
- Send Invoices Promptly
- Get Paid Faster
Scope of ARM
When you sell your services to clients on credit, you need to thoroughly keep track of all their past dues and then decide on a credit term that benefits both business and customer. Managing all such outstanding receivables is highly critical to your business since it will help you understand how much your customer owes you and also aid in recovering the dues and materializing your sales.
10 Tips to Optimize Account Receivable Process
Optimizing your accounts receivable process will improve your workflow. Your business can be healthier than ever with the suitable systems in place. There are ten essential accounts receivable process improvement ideas. Let’s explore it.
1. Payment Terms
Establishing exact payment terms for your company is important. It can challenge credit managers. However, it’s a powerful tool that empowers you to make a solid deadline for payment and lay out penalties for late payment, ensuring you’re in control of your cash flow.
Just communicate these payment terms with your customers before conducting business. Otherwise, your payment terms may be unwelcome, damaging your future working relationship.
2. Let Customers Know You Report to Credit Bureaus
Customers who know the speed of their payments will be reported to a credit bureau tend to pay quickly. Companies don’t want credit bureaus showing late payments on their credit report. This is because it can affect future lines of credit.
A proper way to let clients know you report to a credit bureau is by including the information on your invoice. Startup Fino gives all AR contributors a stamp for their invoices. Thus, users can let their customers know their AR is being reported, encouraging faster payments.
3. Accurate Customer Database
Maintenance: Invoices must contain accurate information about your client. By maintaining an up-to-date customer database, you’re proactively ensuring you have the correct contact information and that your invoices go to the right place, giving you a sense of security and preparedness.
Many companies are taking a data-driven and efficient approach to leveraging 3rd party data feeds to enrich their customer documents with the most recent information.
4. Enable Electronic Payments
Enabling your customers to pay you electronically is not just a convenience for them, but also for you. It allows you to receive payment as soon as they receive your invoice, promoting an efficient and modern way of doing business.
After all, you can send an invoice and receive a payment within the same day. This gives you nearly instant access to working cash flow.
5. Create a Payment Plan
You may be invoiced for large shipments or billed for long-term projects. It can be done depending on the nature of your business. Making a payment plan will resist delays in your payments. It also sets you up to receive a proper inflow of cash.
Service-based companies can make a variation of this by invoicing as each stage of a project is finished.
6. Automate Your AR Processes
These are some of the best software solutions. These can even pull data from the purchase order. It helps to populate the invoice before sending it to the client. Automation will result in less paperwork. It also makes faster payments.
7. Incentives for Early Pays
Fines for late pays can prevent clients from avoiding/neglecting their invoices. You can give incentives to your clients to pay early. Thus, clients may pay you even faster.
8. Risk Assessments
Performing risk assessments on who you do company with is vital. This is because it identifies potential threats to your accounts receivable. But, performing risk assessments can be time-consuming.
9. Early Deadlines
Most businesses will discover that earlier deadlines can encourage quick payments.
If you’re a major distributor, a net of 30 or 60 invoices can give your customer time to review their order. However, for smaller orders, a net 15 or 10 deadlines can make a greater sense of urgency. It also pushes your clients to pay you upon receipt.
10. Automate Your Payment Reminders
It’s not uncommon for clients to deliberately neglect your invoices. Even larger companies may delay payment to focus on paying others.
The right AR remedy gives automated payment alerts to your customers. It involves reminder text messages or emails. These reminders enable your customers to pay their invoices quickly. It results in fewer bills being lost in the shuffle.
Winding Up Note
AR management is essential for securing a healthy cash flow. It also minimizes the risk of bad debt. You can determine how much your clients owe you and estimate when you should expect to receive payment. It can be done by taking control of your accounts receivable process. Better control of accounts receivable can also help you improve collections or avoid extending credit to customers who are unlikely to pay.
Startup Fino can protect your AR portfolio by monitoring the credit risk of your clients.
Check out our credit resource hub for more insight into improving accounts receivable. To learn more about what Startup Fino can do for your business, contact us or schedule a demo today!
FAQs
What is the importance of AR management?
Accounts receivable management is critical to ensure the running of business operations. It also allows no cash to be tied up in customer invoices. It helps:
- Keep account balances up to date
- Maintain accuracy when reconciling accounts
- Accelerates cash inflows
- Identify and resolve late payments from customers
How do you manage account receivables effectively?
Here are a few ways to manage accounts receivable effectively:
- Establish a clear internal process
- Ensure a two-way communication
- Build a robust post-sales setup
- Make sure of the timing and tone
- Make more payment options available
- Initiate high-quality customer interactions
- Automate the accounts receivable management process
How can AR management improve cash flow?
Some practices in AR management can improve cash flow. It involves setting clear credit terms for customers, invoicing customers for products or services rendered, following up on overdue payments, etc. It offers discounts for early payment and analyses AR ageing reports regularly.
What are the consequences of poor AR management on cash flow?
Poor accounts receivable management can result in cash flow challenges for businesses. It includes delayed or insufficient funds to cover expenses. It increased the risk of bad debt write-offs. It also strained customer relationships due to late payments.
What are the five steps to managing accounts receivable?
Here are the five steps to managing accounts receivable:
- Setting up clear collection plans
- Creating an AR Report for measuring the liquidity
- Building invoice templates and sending reminders at regular intervals
- Implementing credit rules
- Framing and documenting payment terms and conditions
What are the most common challenges with AR management?
Accounts receivable management commonly faces challenges such as high DSO, misalignment between sales and AR teams, manual processes, data fragmentation, workflow disruptions, and a lack of empirical data. Businesses must implement a structured and agile AR management system to address these issues.
What is poor management of accounts receivable?
Poor management of accounts receivables refers to the various operations and financial issues of a business that impact receivables management efficiency. Some familiar drivers are late invoices, higher DSO, data discrepancies, inadequate credit checks, time-consuming manual processes, etc.
