What Is the Accounts Receivable Process?
Having cash in hand for working capital needs is the primary necessity for any business. While there are numerous sources of working capital, a company's account receivables have the greatest potential to fill the gaps. It is not only a better choice but also a safer one because you can cut down on the interest you pay on borrowed funds.
The heart of accounts receivable lies in how effectively you are able to manage your collections and get paid on time. Setting up a collection strategy is not easy especially when a business still uses traditional methods of operating accounts receivables.
What is the main objective of Accounts receivable management?
The primary objective of accounts receivable management is to bring down DSO. DSO or Day Sales Outstanding refers to the amount that customers owe the company for their credit transactions. Poor DSO indicates a substantial amount of company's money stuck with the customers. This can affect the company's cash flow. Accounts receivable management will help you identify problem areas in your current AR process and help you find better steps to streamline for quicker collections with a more efficient process in place.
54% of CFOs find liquidity and cash management a challenge. As a finance leader, it is frustrating to be unable to free up the cash hiding in the business. A streamlined accounts receivable process can help you collect efficiently.
Here are 5 best practices for accounts receivables that you can implement to make your collections process more efficient and quicker.
1. Set up good credit practices
A company may have many customers, but it is not necessary to extend credit to all of them. Before trading on credit, it is best to have good credit policies in place. Setting up a solid credit application process can be the first step.
What role does a credit application process play?
- It assists you in weeding out customers with poor credit.
- It is preferable to state payment terms and conditions in order to avoid confusion on the part of either party.
- It makes the process legally binding.
Smaller and medium-sized businesses trade quickly to get more customers. But how worthy is a customer who cannot pay on time or defaults payments? So it’s advisable to be mindful before you extend credit to any customer.
2. Use e-invoicing and payments
Invoicing is a time-consuming and difficult manual task. The time saved in this process can be put to better use by developing better collections strategies or performing other AR tasks. While the transition to an ERP system may appear to be complicated initially, it simplifies and eases the lives of your collections team in the long run!
Customers can make payments more easily with an invoicing system that includes integrated payment processing. An automated billing process would take care of these:
- Creating email templates for sending out invoices
- Scheduling billing frequencies with customization
- Sending out recurring invoices to clients based on their due dates
- Help generate quick statement of accounts
3. Automate your collections process
The availability of free cash and the ability to borrow cash at lower interest rates has become difficult than before. Finance executives frequently overlook this. A successful AR process will assist you in maintaining a positive cash flow. The only way to accomplish this is to have a faster and more efficient collections practice.
Manual following up takes 67% more time to follow up on overdue payments. By moving away from manual AR processing, you would be able to significantly bring down your DSO, by about 40%. If you are a finance leader, here are 5 reasons why you should automate your accounts receivable process:
- When you work with multiple tools, keeping track of AR data becomes difficult. When you need to consolidate data from your ERP or other accounting tools to create reports for management, it can get difficult.
- It enables you to have a predictable cash flow for your business by forecasting effectively using current and past receivables reports. The manual process lacks real-time visibility.
- It is nearly impossible to reduce DSO manually without automation, especially if your company is rapidly growing. Manually following up on invoices will not allow you to clear past dues efficiently. And these frequently result in bad debts.
- Accounts receivable automation provides visibility into various metrics that are important for management decision making. Many tools include an interactive dashboard that allows you to see an overview of your key performance indicators (KPIs) such as cash flow reports, DSO, CEI, and much more.
- AR automation ensures collaboration between teams and continuity of business. Many companies have AR processes that do not connect the sales team and finance team. This communication gap results in delayed collections and poor customer experience.
For instance, a tool like Growfin can help you accelerate your collection by 20% and improve your collections efficiency by 50%.
“We were able to bring down our DSO by 40-45 days as we included Growfin to our tech stack,” says Global Finance Controller of Hubilo.
Automating and digitizing AR processes can speed up your collections by 34%. With an efficient collections process you would be able to utilize the cash trapped as receivables to put it for working capital use.
Read up: Why manual AR process can be more expensive than you think
4. Create customized collections strategies for various customers
Every customer operates differently. One collection practice might not work for the other. And this is why it is important to study your customers based on their industry and domain before setting credit limits, dates, and practices. Customized strategies help collect without delays. Here are a few things you can follow to set an effective collection strategy for your business:
- Create a tracking system that gives you a birds eye view of your overdues.
- Lay down strict protocols for delayed payments. Even though you might have collections automation, there might still be some customers who need following up over the phone
- Stick to a stringent credit check before agreeing to trade on a credit basis.
- If you are finding manual collections process inefficient, switch to AR automation for quicker cash collections.
5. Offer multiple payment options
All customers cannot pay by the same method. While some prefer signing cheques, others might want to pay through payment gateways. Having multiple payment options will make the payment experience easier for customers. This is a low hanging fruit that can be achieved easily. Find a tool that can help you integrate various payment options.
This also improves overall customer satisfaction and encourages them to make timely payments. Some of the payment options you can consider can be hosted payment gateways, local bank integration and self-hosted payment gateways.
Collections might seem easier only until you see your business growing and any business is bound to grow.
Before setting up a collections process, study your existing practices to find where the gaps are. Your collections process is complete only when the cash comes into your bank account.
Like Harvey Specter says, “Don’t lose small, win big.”