Accounts receivable management is a critical component for any organization. Not only does it affect customer relationships, but it also directly influences operating capital, cash flow, and net profit.
Accounts receivable is the total value of payments owed to your business for products and services rendered. Accounts receivable management refers to the processes of ensuring customers pay on time, reliably, and consistently.
Below we dive into eight strategies to optimize your AR management system, optimize cash flow, and strengthen client relations.
Best Practices in Managing Accounts Receivable
Cash flow is what drives your business forward. Collecting your accounts receivable efficiently is what contributes to healthy cash flow. If you begin implementing the below eight best practices today, your business will see worthwhile results.
Automate Your Accounts Receivable System
If you deal with a high volume of customer invoices, it might be best to automate your AR process. A reliable ERP system and AR automation will be efficient, accurate, and stress-free. AR automation splits up into two categories: e-invoicing and customer data.
E-Invoicing
An ERP system makes the invoicing process much less time-intensive. It will also keep you on track and organized with your collections. An automated billing process and ERP system will allow your business to complete the following:
- Customize and adjust certain billing timetables and frequencies
- Prepare email templates for critical communications
- Boost the timeliness and accuracy of your client invoices
- Streamline the recurring billing process for customers
- Produce account statements with a couple of clicks
- Review customer details, financial information, and other communications
- Achieve time savings and prepare reliable AR aging
When you automate the above tasks, your company can achieve more efficient invoice cycle timing, reduced processing costs, seamless cash management, and stronger customer relationships.
Customer Data
Customer information could be found in a lot of places: Google Sheets, Microsoft Excel, paper, and the list goes on.
Locating critical client data should not be stressful and time-intensive. This data should be streamlined and housed in a single place, which is where an ERP system comes into play. This solution enables you to review clear dashboards and access critical data at any time.
A solid ERP system will allow you to access and review information in just a couple of clicks, including:
- Key stakeholders within an account and their contact information
- The responsible account executive or project manager assigned to the account
- A chain of all communications and emails between you and the customer
- A detailed log of all transactions
- Notes or unique information input by your team
Billing and Invoicing Terms
Another best practice is to shorten your payment terms with your customers. A shorter payment team will incentivize and encourage slow-paying customers to remit payments quicker. Instead of a 60- or 30-day payment term, you could trim it down to 10 days.
Doing so will optimize your cash flow and keep your customers accountable.
Another option would be to reward your customer for paying earlier. If the above suggestion does not work, perhaps you could offer customers a discount if they pay within 10 days.
If they pay within 30 or 60 days, they will pay the full price. This adjustment will incentivize customers, even more, to pay on time.
Revamp Your Collection Strategy
Establishing a reliable collection strategy should be a priority and it should involve all your stakeholders. It is also wise to revisit your collection plan and identify any process gaps.
When your AR system is automated and a delinquent account transitions into the “overdue” category, the team will know which outstanding accounts need to be addressed. From here, they will refer to the collection guidelines you have in place.
The best way to start is by distributing electronic invoices to customers. From there, a reliable workflow for accounts receivable could include the following steps:
- Invoice Due: Establish a weekly reminder message for customers after their due date, including a copy of the invoice, a polite nudge, account statement, amount owed, and payment terms.
- 2nd Week: If there is no response to the initial reminder, you should have another templated follow-up message. This email should include all the same details, including a note explaining how invoices and reminders do not go unnoticed.
- 3rd Week: If another week passes by with no acknowledgment, you may need to deploy a different method of communication. Once you contact the correct person, confirm that everything is working efficiently on their end and offer to assist with any challenges.
If you do not reach the intended person, leave a voicemail and email explaining the reason for the call.
- 4th week: If you reach this stage, it would be best to work out a payment plan.
It is important to note that every interaction with the customer should get recorded in the ERP software. That way, you can organize your activity log and ensure your future actions align with your collection strategy.
Accounts Receivable and Credit Analysis Insurance
If you continuously have trouble reaching customers for a long time, one option is to partner with an insurance company.
Credit analysis and accounts receivable insurance help appease credit concerns and protect the organization against unforeseen losses from accounts receivable issues.
Accounts receivable insurance companies provide services in selecting the optimal customers and markets to stay away from bad debt. Reliable companies will also deliver credit risk management solutions for global businesses.
When you collaborate with an accounts receivable insurance company, you can expect coverage on trade credit insurance, debt collections, credit insurance, risk management, risk monitoring, fraud cover, and others.
What are the types of accounts receivable insurance? Here is a breakdown of the different options you will encounter:
- The whole turnover protects your company against commercial debt non-payment from all customers.
- Key accounts or your business ops to insure your most significant customers whose non-payment will put you at the most risk.
- Single buyer, an option for companies that primarily work with one customer.
- The transactional option protects companies on a transaction-by-transaction basis, which could be useful for an organization with few sales or customers.
The cost of the accounts receivable insurance will depend on several factors, including:
- The geographies and sectors you work in
- The type of coverage you select
- Past losses you have experienced
- Your internal credit processes
- The types of customers you engage with and their creditworthiness
Payment Process Improvement
Simplifying your payment process for customers could be the difference-maker for accounts receivable success. One strategy is to accept multiple payment methods. Giving customers several options will improve satisfaction and eliminate certain frustrations.
While many companies like to mail and write checks, it could be effective to offer alternatives like electronic funds transfers, credit cards, debit cards, and ACH.
Accepting online payments is also extremely effective because you can attach a link to the invoice. Digital payments like PayPal, Venmo, and Zelle are also becoming extremely popular for freelance business owners.
Establish and Enforce Late Penalties
Enforcing penalties on delinquent payers is another effective way to ramp up the cash collection process. Customers never want to pay more than they need to, making late fees an effective tactic. Seeing a late fee contingency will prompt customers to pay on time.
Your business can insert a penalty policy in the initial agreement between the entities. If you have an ERP software or automated system, you can program a late fee to generate on a set timetable.
Weekly Accounts Receivable Reviews
Weekly AR reviews allow for strategic direction, clarity, and alignment. For just 30 minutes each week, your team can assess the AR aging report or other analytics.
From there, the data tells a story about where you and your team should target your efforts in collecting money. Your team can also design strategies and programs to get customers to pay more quicker.
Here are some other topics or initiatives your team may discuss during a weekly AR review:
- Prioritizing specific accounts that are 30-60 days overdue
- Highlighting customer contacts that are difficult to reach and then identifying other stakeholders to contact
- Addressing customer satisfaction levels and fixing any current issues
- Discussing specific client financial situations and making decisions to account for this
Prioritizing Accounts Receivable
Accounts receivable should not only be a top priority for the finance department, but it should also be something the organization closely monitors. When there is a customer billing issue, multiple teams should jump in and play a part.
Whether it’s customer service, sales, or management, it takes a joint effort to ensure optimal cash flow within the organization.
Wrapping Up
As you can see, a sound accounts receivable system does not happen overnight. It requires continuous improvement and effort from all departments. To summarize, here are eight ways your company can enhance AR today:
- Automate your AR system
- Adjust billing and invoicing terms
- Revitalize your collection strategy
- Explore accounts receivable and credit analysis insurance
- Implement process improvement within your payment structure
- Create and enforce late penalties
- Conduct weekly AR reviews
- Make accounts receivable a priority across the organization
