Finances

Accounts receivable management can be more efficient

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This guide outlines how to more efficiently approach your accounts receivable management, and overcome current challenges with it.

Efficiently managing your company’s accounts receivable is essential because it helps you protect your money. It also increases sales receipts, allows you to maximize profits, prevent unanticipated expenses, and more.

For your company’s accounts receivable management to be handled effectively, you must have a solid and proper sales system, a reliable customer contact system, and accurate records. 

Without a firm grasp on these concepts and clear direction from management, any attempt at accounting changes can lead not just to confusion but a financial disaster. Here are some key aspects you should consider while planning out your strategy:

What is accounts receivable management?

Accounts receivable management is any process designed to ensure that money owed to a company is collected from the customers and returned to the company. Without proper management of accounts receivable, there is a greater risk that money will be lost or wasted.

For a company to operate correctly, it needs to generate revenue. Failure to collect money from your customers will make you unable to pay your bills and eventually go bankrupt. To avoid this scenario, you must maintain records of the money coming in from sales and other sources of income, such as interest on investments or bank loans. 

Common challenges with accounts receivable management

As you manage your accounts receivable, ensure you address any issues that arise as soon as possible. Identifying problems gives you more time to find solutions and avoid further complications. 

Here are common challenges organizations face while dealing with accounts receivable management.

Carrying Out Real-Time Risk Assessment with Periodic Credit Reviews

There is a necessary correlation between accounts receivable management and credit. The only way to know whether a credit review is good or bad is by performing a periodic credit follow-up on each of your accounts receivable. 

Few organizations perform regular inspections, leaving them at risk of increased bad debts and decreased profits. On the other hand, companies that perform periodic reviews can recognize risks earlier and reduce their harmful debt exposure.

Delayed Invoicing Leading To Late Payments

Delayed Invoicing is one of the main reasons behind late payments. The organization needs to focus on immediate invoicing rather than delay it so that they can focus on faster collections. 

Avoiding delayed invoicing will provide a better understanding of the AR trends after each invoice gets sent. You can set up penalties for late payments and incentives for clients who make payments on time. 

Time-Consuming Cash Application & Collection Procedures

Many organizations are using manual processes to manage AR. Manual accounts receivable management is why organizations take so much time to apply and collect payments. Organizations must adopt proper accounting software to perform cash collection and application tasks faster by utilizing all possible modules.

Invoices Delivered to the Wrong Recipient

Invoices can be delivered to the wrong recipient when the payer’s account information is not updated. To avoid this, the organization must update the payers’ details with their accountants before invoicing for a positive user experience.

Best practice for accounts receivable management

When managing accounts receivable, you should know the number of uncollected payments and receivables you have on a real-time basis. There are several important factors to consider to implement practical solutions.

Outline Clear Billing Procedures

To ensure that invoice payments are received, you must have a straightforward billing procedure. You should communicate to your customers the time frame for processing payments and the relevant date. Ensure your clients understand each step in the billing procedure. 

You must update your client portfolio with any changes in the number of clients or new clients. Updating your billing portfolio helps you accurately keep track of your AR processes and continue to manage them effectively.

Use Electronic Billing & Payment

To increase the efficiency of your processes, you should consider using electronic billing and payment methods. Electronic billing and payment will help you with your AR processes faster and more effectively. 

With this service, clients make payments online, and you can leave your customers confident knowing that you received payments on time. Electronic billing and payment offer additional benefits, such as reduced overhead costs, increased cash flow, and better debt collection.

To ensure that you have proper billing procedures, your accountants can suggest the right software for AR processes and help you decide what software is best for your company. They can also suggest ways to improve the efficiency of your processes and help you better manage your AR.

Review At-Risk Customers To Mitigate Risks

It’s essential to regularly review your at-risk customers to mitigate any risks you come across. These customers are considered to have a high amount of debt and could be in a situation where they cannot pay their debts on time. 

To determine which customers fall into this category, consider factors such as their credit history and their number of payments past due. Then, use a credit scoring system to identify potential opportunities within your account portfolio. 

An effective credit scoring system will look at factors such as a customer’s payment history and the number of days past due on their accounts. This automation software will help you prioritize accounts and focus on those considered a high risk when making payments on time.

Set up Automations to Track Payments and Billing

Make use of automated tools to track payments and invoices. Automation will help you better understand the transactions that are taking place. You should also focus on automating the monthly billing to manage your CRM processes most effectively.

Use online payment monitoring to ensure you’re always aware of payments. Online payment monitoring will enable you to control your AR processes and make timely updates to your AR information whenever clients make payments or invoices get issued.

Create a Plan for Managing Your AR Processes

To ensure you can effectively manage your AR processes, you must create a complete plan on how to manage the setup. The plan should include budgets, goals, timelines, activities, and milestones. The scheme will help ensure that your solutions are as efficient as possible and allow you to make changes when problems arise.

Ensure that the company’s records are updated to be as accurate as possible. The plan should be updated whenever a change occurs within your business, so if any updates are required, they should always be done promptly for better results.

Improve Customer Experience

To improve your customers’ overall experience, you need to address any concerns they may have in a timely fashion and consider their needs regarding payments and billing. Improving your client experience will help reduce the amount of AR in your business and encourage your customers to purchase more items.

You should regularly communicate with your customers about their purchases and invoice status. Effective communication is required to keep track of their invoices and payments, as well as when clients will make payments. Customers will also have the opportunity to raise concerns regarding the payment process. 

Use the Right KPIs to Track and Monitor

You must monitor your progress using key performance indicators (KPIs). You should regularly monitor these KPIs to ensure you follow your plan. You must observe all your KPIs in detail and be prepared to make changes when they start to fall short of your expectations.

These KPIs need to be measurable and dependent on the business processes to help you understand any issues that may be occurring with your clients and their sales in general. Here are some of the most efficient key performance indicators to utilize. 

Days Sales Outstanding (DSO) 

Track the number of days a customer’s payment is overdue. The DSO provides essential insight into traffic patterns, sales forecasts, and the overall performance of your business.

Average Days Delinquent (ADD) 

The ADD is calculated by taking the total number of payment days and dividing them by the total number of invoices. Average days delinquent will give you a moderate number of days a customer has not settled outstanding balances.

Turnover Ratio

Calculate the turnover ratio by dividing the total number of invoices by the number of customers who have not paid on time. The turnover ratio will give you an idea of how quickly you receive payments. 

Revised Invoices 

When you change or update your invoice or purchase order, the revised invoice data automatically include the new information. This way, you can monitor how changes affect your AR management insights and continue making improvements as needed. 

Involve All Teams in the Process

When doing your accounts receivable management, you should involve all your teams. Including your team will help ensure that all employees get updated on what is happening with the AR processes. 

Involve all of your staff in managing your AR processes helps everyone know their roles and understand how to handle any issues that may arise. Proper organization will help prevent any problems from occurring later on and minimize any disruptions to your business operations. 

Final thoughts

AR management is essential for any company looking to improve its sales and overall performance. The right strategy will help you leverage your existing sales and manage your overall spending. Moreover, enhanced accounts receivable management will better understand your client’s needs and help you maintain a high level of customer satisfaction. 

 

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