Most businesses operate on credit. But there’s always a risk that some customers may miss the due date and fail to pay the invoice. It affects your cash flow. It is where efficient accounts receivable management becomes crucial. An accounts receivable management system helps you navigate these challenges. It ensures both credit management and customer relationships. It also allows timely customer payments. This article deals with account receivable management. It also explores its importance in the growth of business.
Accounts Receivable Management
Accounts receivable management refers to handling the amount a customer owes you for the goods purchased on credit. It includes monitoring invoices, collecting payments, evaluating, etc. It also helps mitigate credit risks and resolve customer disputes.
Compelling accounts receivable management is critical to maintaining a positive cash flow. It also fosters a successful customer relationship. It involves tasks like onboarding new customers, evaluating their creditworthiness, etc.
After all, AR management will help you reconcile received payments with corresponding invoices. It addresses any discrepancies and resolves any deduction requests raised by customers. This comprehensive approach ensures a smooth handling of collections throughout the customer lifecycle.
Scope of ARM
When you sell your goods or services to customers 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 extremely critical for 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. You will use AR management to:
- Define relevant credit terms and decide on the credit period
- Monitor and resolve long-pending invoices
- Monitor and record outstanding amounts on invoices
- Track the payment behavior of customers and leverage insights to boost collections.
Gifts of AR Management
AR management is critical for smooth business operations and ensuring no money is stuck on customer invoices. It helps accelerate cash inflows in the business and ensures a continuous flow of payments, streamlining future cash flows.
Whenever a customer delays in paying invoicing, a business faces a lot of cash flow and liquidity problems, resulting in financial issues and working capital shortages. Effective receivable management will help fast-track collections, efficiently track invoices, leverage insights on customer behavior patterns, and prevent collections from ageing. It will also improve the bottom line as it helps convert revenues into actual cash and add to profits.
However, the benefits go beyond materializing sales and improving cash flows. It can also play a solid driving role in improving your business’s reputation and attracting investors as it examines how well it handles payments, maintains timely payments, and assesses a company’s creditworthiness.
Objectives of ARM
As your business grows, complexities in accounts receivable, such as rising bad debts, ageing collections, and invoice issues like overcharging, can become more significant. It’s essential to have an efficient and agile receivables management process in place. Here are some key objectives of accounts receivable management
1. Accurate bank reconciliation
Bank reconciliation involves managing various remittance formats, including addressing missing remittances. This task can be time-consuming and prone to errors if not organized properly. With an efficient system, your AR team can save significant time sorting and applying payments.
2. Improved invoicing issuance and tracking
Streamlining invoicing processes can prevent billing errors and ensure invoices reach customers. A thoughtfully built AR management facilitates easy invoice sending, enables direct payments, and tracks invoices regularly and accurately. It can also assist you in providing various payment choices, like credit/debit cards or ACH drafts, enhancing customer convenience.
3. Effective deduction management process
Effective receivable management enables AR teams to explain each item to the customer in case of disputes and offer alternative solutions such as payment plans. Moreover, it also helps rethink your existing deduction management process, validate customer invoices and resolve disputed invoices on time, leading to customer satisfaction and a seamless experience.
4. Credit workflow management
Effective receivable management is significant in boosting sales and framing accurate customer credit policies. You can extend credit and initiate favorable payment terms to increase revenue while allowing customers to pay at their convenience.
However, ensuring effective credit management for improving receivables calls for effective credit policies that necessitate periodic reviews, defining benchmarks, laying out escalation procedures, effective customer credit scoring, and complying with federal and state regulations. A good account receivable management must ensure accuracy at each phase and support faster collections.
5. Streamline cash flow management
Receivables management’s primary goal is to help businesses keep their cash flows steady. AR management gives you a clear picture of where and how much of your cash is tied up and records all sales transactions systematically. It also ensures you have sufficient money in your reserves to carry out daily operations, not giving customers credit benefits over and above the decided credit limit.
6. Improved customer relations
Continuously contacting customers after they have already made a payment can lead to frustration. Similarly, expecting payments from customers without sending invoices on time can also have a negative impact. It’s, therefore, vital for you to ensure transparency in the accounts receivable management process to build a more robust and long-lasting relationship with your customers.
AR Management Process: How to Improve?
There are many components to accounts receivable management. To manage the process efficiently, you must handle elements. These elements involve credit risk mitigation and evaluation, invoicing, collection, reconciliation, etc.
Here are some accounts receivable management techniques that will help you address each element of AR and gain comprehensive control over the process.
1. Robust post-sales setup
Many collection issues stem from customer dissatisfaction with post-sales support. This tip applies to all customer-facing teams. As a finance team member, you should ensure that all sales-related documentation reaches customers on time. Additionally, you can streamline the invoicing process with meticulous attention to detail.
4. Timing and tone
There are two crucial aspects of invoicing. First, ensure that invoices are sent out promptly and in line with agreed payment terms. Establishing a consistent invoice delivery schedule prompts customers to anticipate and prepare for on-time payments.
Secondly, pay attention to the tone of your communication when sending invoices. Maintain a transparent, concise, and polite approach to the invoice content and accompanying email communication. Avoid clutter and ensure all necessary details are included for a smooth payment process.
1. Clear internal processes
Often, the root cause of your collections and cash flow issues is simply poor internal processes. One of the easiest ways to mitigate these constant issues is to ensure each team understands the other’s end objective. Sales should focus on getting orders, and the finance team should ensure that the customer is financially sound enough to warrant credit terms. However, it is equally critical for each team to support the other in these processes.
2. Two-way communication
Establishing effective two-way communication is essential. It is both internal and external. After all, it may seem like an obvious factor. But it is often ignored, especially regarding the finance team. Enable easy-to-use and numerous options for stakeholders is needful. After all, both internal and external can be used to interact in the way they choose to.
3. AR automation
Automating the process is one of the most essential and urgent steps to streamline receivables management. API-enabled automated accounts receivable will not only handle collections or invoice issues but also help create efficient workflows, reduce process complexities and operational costs, and accelerate your teams’ productivity.
Winding Up Note
Compelling accounts receivable management is crucial for maintaining a healthy cash flow and minimizing the risk of bad debt. Part of that is getting paid online, which helps businesses run smoother and more efficiently. 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.
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FAQs
What is the importance of AR management?
Accounts receivable management is critical to ensure the smooth running of business operations and that no cash is 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
What is meant by accounts receivable management?
Accounts receivable management refers to managing and tracking the payment due from customers for the goods and services purchased on credit. It includes monitoring invoices, collecting payments, examining and mitigating credit risks, and resolving disputes.
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.
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
