Management of Accounts Receivable: Best Practice Tips

A healthy business maintains healthy cash flow. Proper management of accounts receivable makes sure that your cash flow keeps coming in, your collection processes are working smoothly, and that your customers are having good experiences. 

We’re going to see how accounts receivable automation software and managing accounts receivable and payable can keep your business on the right track.

Coming Up

What is Accounts Receivable Management?

What are the Benefits of Managing Accounts Receivable?

What is the Account Receivable Process?

How to Improve Accounts Receivable Process?

What are the Challenges of Accounts Receivable Management?

How to Measure Performance of Accounts Receivable Management?

What are Best Practices for Management of Accounts Receivable?

Closing Thoughts

What is Accounts Receivable Management?

Accounts receivable management refers to monitoring that customers pay the invoices they owe to your business for the goods or services that have been rendered. 

These goods or services have been purchased on credit, so AR management is what ensures the business gets paid all that it is owed in a timely manner. 

Management of accounts receivable involves:

• Defining credit terms and limits
• Invoicing customers
• Checking creditworthiness
• Collecting overdue payments
• Following up on late payments

From just the bulleted list above, you can see that AR management can become overwhelming, especially as your transaction volume grows. 

This is why so many companies turn to accounts payable software / accounts receivable software, along with finance automation software, to streamline and automate such critical business functions. 

What are the Benefits of Managing Accounts Receivable?

Efficient management of accounts receivable shouldn’t be a choice, it’s necessary to continue running a business properly. 

By accurately staying on top of the money that you are owed, your business will benefit from: 

1. Faster Billing

Through finance automation, you will remove bottlenecks that may otherwise plague and slow down your accounts receivable process. Whether the process gets stuck during credit review, uploading documentation, or anything else, manual AR processes can result in delayed payments. 

2. Fewer Disputes 

Without manual data entry, there’s less likelihood for errors and disputes to occur. With the right automation software by your side, you can streamline your accounts receivable management with ease and peace. 

3. Saved Time

Rather than relying on your finance team to manually enter data, send invoices, and follow up, you can save a ton of time by using automation software. 

Along with automating accounts receivable processes, you can utilize finance automation software to connect your disparate data, remove spreadsheet-dependency, and streamline other critical finance processes (i.e. reconciliation, regulatory reporting, etc.) too. 

4. Improved Vendor Relationships 

Along with improving customer relationships, you’ll also boost vendor relationships with faster billing cycles, accurate billing, and less errors. 

When vendors have the option to pay their invoices digitally or in an easy-to-use portal, they can continue focusing on the parts of their job that matters, rather than having to deal with paying bills. 

5. Enhanced Employee Experience

Let’s face it– no one enjoys performing the same manual and tedious duties day-in and day-out. Your finance team has more to offer your business than handling data entry and sending out invoices, right? 

Let them showcase their value by automating the repetitive responsibilities so that they can focus on value-add actions. By doing so, your employees will feel more satisfied and happy. 

What is the Account Receivable Process?

The accounts receivable process may be handled with different tools and people for every business. 

However, the typical process runs through the same steps, namely:

1. A customer places an order
2. The company reviews the customer’s creditworthiness and approves the customer for credit 
3. Company sends the invoice to the customer
4. The company keeps an eye on collections
5. Should there be any disputes, the company must review 
6. Company processes the payment made by the customer
7. The company posts the payment to the invoice 
8. Company reports on the accounts receivable status continuously 

To handle the AR process, you have two options: do you want your finance team to handle this all by hand and across various, disconnected spreadsheets and systems? 

Or, would you prefer to have a clear overview of the process’ status, all centrally located in an easy-to-use system that automates each step while preventing bottlenecks and manual mistakes? 

How to Improve Accounts Receivable Process?

The best businesses are always looking for ways to improve their processes. In an effort to boost your accounts receivable process, consider the following recommendations:

1. Set Payment Terms

It’s vital to set payment terms and communicate them with customers before they make a purchase. This way, when you enforce the terms, they are aware of where they are coming from. Terms should include: payment due date, late fees, discounts/incentives for early payments, and any other penalties or details. 

2. Keep an Eye on Invoices

Monitor invoice to make sure that customers are making payments in time. Accounts receivable software alleviates the burden of having to constantly check on invoices. You can set up a schedule for reminders to go out at your chosen frequency once a deadline has been missed. 

3. Resolve Disputes

Tackle disputes or issues head-on rather than procrastinating. By addressing issues straight away, you can not only get paid, but you can also maintain a good working relationship with your customer or vendor. 

4. Add Payment Options

The more payment options you provide, the easier it may be for customers to pay their invoices. For example, consider offering credit cards, checks, debit, and third-party payment platforms. 

5. Automate! 

Of course, this list of best practices wouldn’t be complete without the inclusion of automation software. Automation software eliminates many of the hurdles associated with collecting payments on time, all while saving your team time. 

What are the Challenges of Accounts Receivable Management?

Accounts receivable management is a fluid process that expands with every transaction. With more transactions and volume of customers, the process balloons, so having accounts receivable software in place to help manage the workload is key. 

Typical challenges involved in accounts receivable management include: 

1. Invoice Errors 

Data inconsistencies and incorrect invoice amounts result in payment delays, as well as frustration on behalf of the recipient and business. 

2. Overlooked Reminders

Missed reminders can further delay the payment of overdue invoices and add risk to the collections process. 

3. Late Payments

When payments are late, the business suffers from slowed cash flow. This can affect a business’ ability to cover or offset its operating costs. 

4. Incorrect Allocations

When performed manually, the chances of mixing up invoices can lead to bigger issues and result in poor trust between a customer and business. 

5. Bad Customer Experiences 

Any poor experience a customer has with a company’s accounts receivable process can end up destroying the relationship and prompting customer churn. 

How to Measure Performance of Accounts Receivable Management?

How do you know if your accounts receivable management is up to par? 

There are metrics you can monitor to review how your process is flowing. A few key AR metrics include: 

• Days sales outstanding (DSO)
• Accounts receivable turnover rate
• Average days delinquent (ADD)
• Collection effectiveness index (CEI) 
• Expected cash collections
• Number of revised invoices
• Percentage of high-risk accounts 
• Average collection period
• Customer satisfaction 

When you’re able to measure these key performance indicators (KPIs), you have data to back up how your process is performing. This way, you can spot where inefficiencies or issues reside and make the necessary changes to improve. 

What are Best Practices for Management of Accounts Receivable?

Improving your accounts receivable process relies on enforcing best practices. Along with the improvement suggestions listed above, it’s also a good idea to:

1. Track Metrics

With the use of data and metrics, you can have better control over your accounts receivable process as you’ll know how workflows are moving along. A few metrics worth reviewing include:

• Days sales outstanding (DSO): This helps you assess the average time it takes to collect payments after a sale. The lower the DSO, the more efficient your collections process. 

• Average days delinquent (ADD): This measures how much time a payment sits overdue. A Higher ADD means that you have more consistent payment delays, which would signal the need for a change. 

2. Use Digital Tools 

The use of automation solutions and digital tools makes it easier to increase internal control and streamline your workflows. With online tools, you gain access to real-time analytics and smoother communication between team members involved in the process. In the same vein, you open up better communication with customers. 

Closing Thoughts

The management of accounts receivable is critical for every business to have a strong hold on. When it comes to finance functions, automation software can provide everything you need to streamline processes, reduce manual errors, and support better customer and employee experiences so your business can get paid on time. 

Accounts receivable software will undoubtedly increase your business’ efficiency. For even greater outcomes, productivity, and analysis, finance automation software can be deployed to connect data, derive insights, and increase productivity. Ultimately, technology is here to help your business become better!