Best Practices for Accounts Receivable Management

Oliver Lee
August 17, 2022
 Mins Read

Accounts Receivable (AR) is defined as the money owed by customers to another entity in exchange for goods or services that have been delivered or used, but not yet paid for. Why does it have to be managed? Well, here’s why.

If business was conducted in an ideal world, then buyers would make their payment at the same time as when the product was sold to them. Then sellers would not have to worry about their cash flow situation. But business is not conducted in such an environment.

In the real world, sellers face intense competition and they often have to offer their goods on credit to attract more customers. Some of these customers default on their payments and sellers are left looking at potential losses on their sales.

According to an Aberdeen Group research titled ‘Receivables Management for the Long Term: Balancing Collections and Customer Service' released in 2012, the main driver for AR management is the pressure to reduce Days Sales Outstanding. Other factors include overall cost reduction, customer pressure for extension of payment terms, risk of default, customer demand for improvement of service levels.

If they want their business to continue thriving, then sellers have to take some firm steps for effective Accounts Receivable Management:

  • When a seller is negotiating a big deal with a client, he or she should get a credit report done on the client. The previous payment records of the client will tell the seller if lenient credit terms should be offered to the client or not. Even if it costs a bit of extra money, a credit appraisal should be done. It will save the seller plenty of grief and thousands of dollars in potential losses later.
  • Sellers can tempt the customers into settling their credit by offering discounts for quick payments. Customers might be given 30 days to make their payment, but if they were to make the payment within 10 days, they could be given a 10% discount and if they made the payment within 20 days they could be given a 5% discount and so on. The prospect of paying less always induces many buyers to pay quickly.
  • Most sellers make the mistake of sending the invoices to the buyers late. This induces laziness in the buyers as well. They think that if the seller is not concerned about the payment then they need not be concerned about the payments either. Sellers should make it known very clearly how seriously they take payments and send the invoice as quickly as possible to the buyer and also set a firm deadline for settling the bill.
  • Use the electronic options available these days as much as possible. Send the bill by e-mail. Ask for a confirmation from the buyer that he has received the bill. Register with the online payment options given by banks. Buyers these days are either too busy to come to the seller’s shop or they are simply too lackadaisical. But buyers are always ready to pay on time if they can do it online from the comfort of their office or home. A process that can be done in minutes need not take days.
  • Make sure all the documents related to the invoice are in order. Preparing and sending the invoice is easy if the sales team does not have to scramble around at the last minute looking for pieces of paper. Concurrently, if the customers have any queries about the invoice they can be solved quickly with well-filed documents. Make sure all the scanning, digitization, extraction, and indexing of data is done regularly so that the payment is not held up for insignificant reasons.
  • Invoice preparation and handling should be done as much by the sales team as possible. It should not be put in the hands of a separate accounts department. The sales team knows who they sold the product to and how much they sold. Too many cooks spoil the broth and having too many people handling invoice documents only causes confusion.
  • Build a relationship with a reputed customer service company that provides collections services. Yes, despite the best efforts of sellers, there will be buyers who will not pay on time. Many of them will default altogether. Sellers have to run their business and cannot afford to go chasing after each and every customer who does not pay. A professional collections BPO company can get customers to pay more efficiently and thoroughly.
  • Businesses need a constant flow of cash to stay afloat. They cannot wait for the customer to pay at a later date. So go to the bank or a financial institution and utilize their factoring facilities to get the bill disposed of and to keep the money coming in.
  • Make sure that all the authorized signatories to the bill clear it as quickly as possible. If possible have as few signatories to an invoice as needed. The more time the bill floats around inside the various departments, the longer it will take for the payment to get made.
  • Maintain an exclusive accounts receivable register. Do not allow any account to age beyond a certain point, no matter how small the amount. Use the register to keep track of defaulting customers and do not do business with them again. Make use of financial analysis reporting to streamline and predict the cash flow cycle within the business.

Companies lose a lot of money from delayed payments and defaulting customers. It hits their balance sheet, their working capital, their cash flow position, and their ability to continue doing business. Even regular payers can face cash flow problems and default occasionally. Accounts receivable management is more than just about collecting what is owed to them. It is about keeping the business up and running.

Article by
Oliver Lee

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