Account Receivables Management: Best Practice Tips

A well-run, efficient accounting department who collects invoices in a timely fashion and ensures that client funds for services rendered make their way into company coffers is at the heart of every successful business.

Here, we will examine how CFOs can maximize the effectiveness of the accounts receivables department by following established best practices and leveraging the power of accounts receivables software like SolveXia.

Coming Up

What is Account Receivables Management?

What is the Goal of Account Receivables Management?

Why is Accounts Receivables Management Important?

What are the Steps in Accounts Receivables Management?

What Metrics are Used in Accounts Receivables Management?

How to Improve Account Receivables?

What are the Challenges of Accounts Receivables Management?

How Does Automation Help with Account Receivables Management?

Final Thoughts

What is Account Receivables Management?

Account receivables management is the practice and processes in place to obtain payments in a timely manner for goods and services that have been delivered to a client. 

Accounts receivables management involves the issuance of invoices and the necessary tracking to collect payments. By having a proper system and process in place, businesses can ensure that they get paid what they are owed and avoid carrying bad debts. 

What is the Goal of Account Receivables Management?

Having a set accounts receivables management plan in place helps businesses to optimize their billing, payment, and collections. Ultimately, the goal of any accounts receivables is to get paid! 

At the same time, by keeping track of outstanding invoices and being able to adequately assess a customer’s creditworthiness, a business can mitigate their risk and reduce their debts. 

Why is Accounts Receivables Management Important?

A business can neither survive in the short nor long term without consistent cash flow. There are fixed and operating costs that have to be covered while services are being rendered. With proper accounts receivables management in place, you can be sure that you will get paid what you are owed. 

In turn, you can keep a running and profitable business. Besides overseeing that cash is flowing into the business, accounts receivables management also helps to improve customer relationships, account reconciliation, the employee experience, and vendor reputation. 

CFOs are increasingly turning to automation to assist with or simplify their accounts receivables workload. SolveXia’s automation allows you to run your processes up to 100 times faster than manually doing so, with 90% fewer errors and can help you to streamline your complex finance functions. 

What are the Steps in Accounts Receivables Management?

While every company handles their accounts receivables management process in their own specific way, the general steps stand true for all. They include: 

1. Determining Credit Worthiness 

When accepting new customers, you’ll want to be sure they can pay for the goods/services you provide. This depends on their credit worthiness, which is where assessing their credit information comes in handy. 

2. Monitoring Late Payments 

When payments are late, it’s best to send a reminder sooner than later so your cash will come in. Communication is important, as is the constant upkeep to review accounts. 

3. Focusing on Relationships

At the end of every transaction sits a customer that wants to derive value from your goods and services. Addressing their needs is vital to maintaining a solid customer relationship and getting paid on time. 

What Metrics are Used in Accounts Receivables Management?

In order to figure out whether your accounts receivables process is working efficiently or not, you can track certain metrics to assess its condition. 

For example, you can take stock of:

• Receivables-to-Sales ratio: This measures how much money is owed in proportion to what sales have been delivered in a specific time period. A bigger number means that there is a greater number of sales that are generating accounts receivables, as opposed to cash. 

• Days-Sales-Outstanding ratio (DSO): DSO calculates how many days it takes a company to convert receivables into cash. 

• Receivables Turnover ratio: This ratio calculates sales in proportion to the accounts receivables (it is the inverse of the receivables-to-sales ratio). 

How to Improve Account Receivables?

Different companies may have different business models that can add some degree of variance in their accounts receivable management. 

However, every successful and efficiently run accounts receivables department sticks to some universally accepted best practices which are dictated by the core mission of accounts receivable departments. 

Those best practices are:

1. Create a customer-friendly payment system

The easier you make it for your clients to pay your invoices, the more likely it is that they will do so. With that in mind, setting up a customer friendly payment system is incredibly important. 

Ideally, you will have multiple payment methods (e.g., credit card, check, wire transfer, online). It’s also advisable to include these payment methods in your invoices, so that your clients can pay you as quickly and easily as possible. 

2. Encourage on-time and early payments 

Collecting past due invoices is a time consuming process that also distracts your accounts receivables team from dedicating their time to important functions. One way to minimize late payments is to encourage customers to pay on time by giving them a financial incentive, such as a 1% discount on invoices paid within 30 days. 

In addition to this incentive plan, it’s also important to have a “penalty” such as a finance charge for invoices not paid within 45 days of receipt. 

Your clients will have accounts payables teams that realize paying late invoices is just throwing company profits away. More often than not, they will pay-on time to take advantage of your discount and avoid the penalty.

3. Set a reconciliation schedule

Accounts receivables reconciliations, where you compare all of your invoices with payments received, are vitally important part of your best practices. 

Without regular reconciliations, you could end up with multiple clients paying late, or not paying at all. Eventually, this will eat into your cash flow and prevent your company from meeting its financial obligations or projections. 

An ounce of prevention is worth a pound of cure here. The more often you perform accounts receivables reconciliation, the less likely it is you will have a severely delinquent client.

4. Have a plan for debt collection

It’s important to have a comprehensive plan for debt collection. That means tracking payments or delinquencies and contacting clients as necessary via email, traditional mail or telephone. 

There should be a set procedure for dealing with delinquencies; one that also includes alerting upper management to severely delinquent clients and creating a plan for more aggressive collections. 

Many companies will “charge off” debt after 90 days and institute legal action against the delinquent client. Whatever system you choose, it must be clear to both your staff and your vendors. More importantly, you can not divert from this standardized process.

What are the Challenges of Accounts Receivables Management?

Accounts receivables management can quickly become overwhelming, especially when you have a high volume of transactions and multiple payment processors in use. 

It becomes hard for your accounting department to keep up with all the moving pieces, especially if information isn’t centrally organized. 

Without well-defined and standardized practices in place, your accounts receivables process can fall apart. If you’re using legacy applications or spreadsheets to manage your AR, it’s painstakingly time-consuming and messy. 

To overcome all of these hurdles, it’s worthwhile to deploy an automation software that can streamline the entire AR process, increase accuracy, and provide 24/7 visibility and internal control into one of your most important business functions. 

How Does Automation Help with Account Receivables Management?

Accounts receivables automation software offers a host of benefits to companies that choose to use it. Increased accuracy, improved cash flow and better efficiency are just a few of these potential benefits. 

They are all in addition to the really big bonus, which is that leveraging automation will give your accounting time freedom to work on more important tasks such as strategizing and forecasting the company’s future direction.

However, none of this is possible if you don’t choose an accounts reconciliation software that fits your company’s needs and budgetary requirements. 

A finance automation tool like SolveXia offers CFOs and accounting teams an impressive combination of power, speed, accuracy and cost effectiveness. We invite you to request a free demo with the SolveXia team to see how SolveXia can help you streamline your critical finance functions. 

Final Thoughts

Accounts receivables management is a primary concern for any business, big or small. But, as businesses scale, AR management becomes increasingly critical so that the business can continue to sustain its cash flow. 

With automation in place, you can eliminate the need for tedious tasks like making manual entries for customer payments and filling out deposit slips. 

Other jobs, such as matching payments to particular invoices can all be done automatically, which will save time and energy for the accounts payable team. All in all, everyone stands to gain with automation software deployed to help manage the nitty gritty details of accounts receivables management.