6 Ways To Conquer Major Accounts Receivable Challenges
 Finance & Accounting

Top 6 Solutions to Overcome Accounts Receivable Challenges

Rick Johnson
Rick Johnson
November 9, 2022
Last updated on:

November 9, 2022


Read time: 7 mins

Accounts Receivables (AR) are perhaps the most critical of processes for any business. The main reason is that improper AR management could lead to unhealthy cash inflows; and, it is not easy to manage AR. There are several challenges that businesses encounter during their AR process cycle. Two recent studies have discovered these challenges.

6 Ways To Conquer Major Accounts Receivable Challenges [/caption] Pay streak Advisors, independent research and advisory firm, conducted a survey among finance professionals to find out their challenges as regards their AR process. According to the survey, the top three challenges include lowering their Days Sales Outstanding (DSO), increasing AR staff productivity, and reducing portfolio risk.

87% of the respondents faced the DSO challenge while the other two were encountered by 86% and 84% of the respondents respectively. A similar survey by Direct Insite, a company providing e-invoicing solutions, found that organizations struggle with controlling labor costs, customer resistance to electronic invoice adoption, and customer attempts to extend terms that can result in default, missed, or delayed payments.

If companies take control of their AR process, these challenges could be overcome in a short while. However, firms must understand and employ the right steps and related tools for overcoming the challenges in the right way. Some of these steps are outlined below:

Reducing DSO

As is known, DSO is a calculation of how quickly, or slowly, a company collects on their AR. By reducing the DSO, a company could effectively improve its cash flow position. You could reduce DSO by:

1. Improve Billing:

The first step towards reducing DSO would be sending out invoices on time. Ideally, invoices should be sent out immediately upon the sale of goods or services rendered. Companies must ensure that billing addresses are verified before bills are sent out. If you find that the manual process is taking too long, consider electronic invoicing. Understand that the longer it takes for the customer to receive their invoice, the longer it would take for you to get the money. Therefore, ensure that invoices are sent out quickly.

Even if you do not get paid immediately, it at least allows the customer to ask questions, and gives you an opportunity to resolve any issues that may result in late payment. Along with this, make sure that billing policies are clearly communicated to your customers. For instance, some companies want to be paid upon receipt of goods or services while others might require 60% on receipt and the rest later. Unless customers are made aware, they would not know when and how much to pay.

2. Give Incentives:

When you offer discounted terms, you might receive quicker payments. You could consider early payment incentives such as a small discount to those customers who pay early. For example, you could offer a discount for paying within a week or 10 days when your payment terms say it is a net 30. This discount can be easily offset by speeding up your cash flow, creating savings on loan fees, and getting similar or better discounts from creditors.

3. Increase Payment Methods:

Sticking to cash only as a method for receiving your payments might cause unnecessary delays in collecting payments. To overcome this, you could consider accepting credit cards and putting your customers on automatic payments. Having a signed credit card authorization form to charge their card with the amount due would help.

Charge the card based on a certain schedule and you are sure to see an increase in your cash flow. You could even enable customers to pay their invoices online. Irrespective of the method you use, make sure that the payment terms and due dates are clearly written on invoices and any other communication sent out to the customer.

4. Do Away with Bad Clients:

A client, who defaults or delays payments every now and then, is not a great client to do business with. Check for clients who might always be inconsistent, unresponsive, and constantly pay your invoices late. Your business cannot afford to waste time and effort on such clients. Consider dropping them from your business list. If you find that a client pays late despite offering outstanding services, you know that it is time to stop doing business with them. The time and effort spent on these clients can be diverted towards obtaining new clients, who might give better business to the firm.

Improving AR Productivity

Automating the AR process might be the right step toward improving AR productivity. By automating the process and centralizing AR data, you could provide collectors the time required to focus on core activities that would help your company get paid faster. Automation would also help improve performance and lower transaction costs. OB10 and The Institute of Financial Operations conducted a survey titled Accounts Receivable Survey 2012.

This survey reports that 85% of AR and credit respondents believe that electronic invoicing expedite the collections process.Traditional, manual AR processing can turn out to be inefficient and costly. By implementing an automated solution, you can streamline your business process, enabling your AR team to improve cash flow while reducing operating costs and enhancing customer service. Other benefits include the ability of collectors to pre-empt customer disputes or payment delays, eliminating the need for rekeying order information, reducing the need for invoice filing, and lower storage costs.

Reducing Portfolio Risks

Understanding your customers is critical to managing portfolio risks associated with your AR. There is a distinct difference between good credit risk and bad credit risk. Some factors that differentiate the two include changing credit worthiness of customers over time, poor monitoring of customer credit worthiness, bad customer references or failing to verify customer references. You could avoid a number of such bad practices by having a credit application form filled in by all customers.

Repeat credit increase requests should be noted. Consider creating a credit score for each customer and make changes to the same as when customers pay early or late or default. Understand that customer credit worthiness would change over time. Therefore, it is important to ensure that they are in good financial health before giving them additional credit or doing further business with them.

Always follow up with customer credit references. Several companies are making the mistake of not calling references despite asking for them and getting them from customers. Another mistake is not sending reminders as accounts become overdue. If customers know that you expect payment by the 20th of each month, you could send a statement to non-complying accounts by the 21st. You can definitely expect to collect at least some of the AR that is overdue by sending such statements.

Perform An Analysis

Reviewing your AR on a weekly or fortnightly basis can help prevent defaults by customers or at least identify defaulting clients who you should stop doing business with. This would definitely reduce your AR balances over time. You would also be able to resolve problems before they become disastrous. In conclusion, it can be said that simple steps are more than enough to overcome challenges associated with your AR. However, they must be done diligently and on time to prevent major problems in your cash flows. Taking the help of an expert Accounts Receivable BPO service provider would surely ensure that the AR balance is kept within limits.

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