Accounts receivable management is a crucial aspect of any business’s order-to-cash cycle. The word receivable refers to the payment not received by the business. When a customer buys a product or service but does not pay the entire amount up-front, the balance they owe is known as accounts receivable.
Accounts receivable can also be described as the money our business has a right to receive after a stipulated period or as a credit facility we provide to our customers. Usually, this credit period is short and ranges from a month to a year or maybe two.
Why Is Account Receivables Management Important?
Accounts receivable management ensures that customers pay their dues on time and prevents the business from falling short of working capital at any point in time.
Proper AR management is essential for the business as it has a marked impact on the bottom line and cash flow.
Ineffective collections management and delay in receiving late payments can result in the availability of inadequate cash to sustain business operations. Good AR management also helps build our company’s financial and liquidity position and contributes to profitability by diminishing the risk of bad debts. A comprehensive collections policy helps in better customer relationship management and client retention.
Policies & Best Practices of Accounts Receivable Management
Effective AR Management does not involve only reminding customers about payments and collecting the dues on time. It also aims at pinpointing reasons for the delay and finding a solution to the issues.
We have listed some practices and policies that can help design sound AR management.
- AR Process Automation
Automation of accounts receivable helps the processing of a large number of invoices. The right automation system with ERP helps improve process efficiency and helps minimize human error. Automation can help in:
- E-Invoicing
ERP helps us optimize the invoicing process by reducing the time spent on it. An automated billing process has advantages like customized billing frequencies, increased accuracy, and time-saving on frequent manual adjustments. It also helps us reduce processing costs and invoice cycle times. Outsourcing accounts receivable management services can help us manage them better.
- Customer Data Maintenance
With an ERP system, we can enter and access customer data easily. This information helps establish and maintain a productive accounts receivable process.
- Incentivise Early Payments
We can encourage early payments by offering customers a small discount if they pay the dues on or before the due date. Small businesses can adopt this as one of the first strategies for better receivable management. Discounts give the customers direct financial benefits for paying on time. The incentive pays for itself when we get cash immediately and avoid delays in getting payments. At the same, customers who delay payments should be penalized.
- Effective Collection Strategy
A proper collection plan with a clear strategy goes a long way toward better accounts receivable management. Automated AR can assist in the implementation of our collection plan. When an account goes into the outstanding category, the AR collection process will kickstart to facilitate the recovery of dues. Adopt practices like sending an automated reminder mail to a customer after the due date. A follow-up mail must be sent after a fixed number of days followed by a telephone call if required and trying to work out a payment plan if the previous steps do not yield the desired result.
- Accounts Receivable Insurance
Another policy for accounts receivable management that can benefit our business is having insurance coverage. If customers are unreachable for a long duration and we have exhausted all options, our insurance plan can help us reduce our credit worries. This type of coverage helps protect the company against unexpected losses that may occur due to non-payment of dues by our customers. Insurance companies can help us choose the right customers after a proper risk analysis to avoid bad debts in future.
- Simple and Inclusive Payment Process
With digitization gaining popularity, there are multiple ways for us to accept payments. While physical cheques are still acceptable, they may cause delays and inefficiencies. It is a wise business practice to offer customers alternative payment options like Electronic Fund Transfer, Digital Wallet Payment, use of credit card or debit cards, and making online payments on our company portal.
These options will ease any payment bottlenecks and encourage customers to use faster modes of payment, which are simpler and cheaper.
Effective management of accounts payables is as crucial as account receivables for a business to function adequately. Accounts payable outsourcing services can help us manage our payments better with professional advice.
- Make AR A Company Priority
Adopt a policy that establishes Accounts Receivables as a company priority and not just as the finance department’s responsibility. The finance department should be at liberty to intervene whenever there is a delay in receiving payments All other departments should cooperate and work together as a team to resolve the issue.
The accounts department should have clear numbers and statistics that can help present an accurate picture to revenue creators to encourage everyone to make AR a priority. Keep the team updated about positive and negative situations and have an open communication channel.
The Conclusion
Adopting the above practices and policies can help us manage accounts receivables better. A well-managed AR system helps reduce write-offs and save time and money. Aim to start early; the longer the invoice sits unpaid, the lower the chances of the customer paying them off in time.