Why manual AR process can be more expensive than you think

Why manual AR process can be more expensive than you think

Processes are difficult to change especially when they are being followed for long. Resistance to change makes companies reticent. Your company is still using spreadsheets and collecting AR manually. If you're still running dunning campaigns and sending manual emails for payments, you're missing out on a more streamlined process that could potentially save your company millions of dollars.

You may be wondering why you should break something that’s working for you/already exists. This is where you pull out your list of pros and cons. By understanding how much manual AR weighs on your pocket, you will be able to decide on switching to an automated AR solution. Manual AR processing costs can be broadly classified into five categories:

  • Interest cost - When you borrow funds from outside sources for working capital needs, you are to pay a small amount of interest over the life of the debt you are taking. 
  • Bad debts - When your debtors default payments even after repeated reminders you write off these amounts as bad debts. Bad debts are an expense of a company. 
  • Administrative costs - Manual AR processing needs a lot of human intervention. Employees spend their time updating records, calling customers, emailing invoices, and maintaining spreadsheets that can otherwise be automated. Paying employees for such mundane tasks account for administrative costs.
  • Opportunity costs - These are opportunities that a business is unable to seize due to a lack of funds. These could be business expansion, developing a new product, providing salary hikes, and much more.
  • Miscellaneous costs - Other costs that come with manual processing of your accounts receivables include the inability to provide discounts, levying late fees, handling bookkeeping operations, etc.

Welcome a huge change with just a small shift

Difficulty to scale as business expands

As your company expands, you begin to offer more credit-based services. This in turn translates to more invoices and more people involved in processing them. Administrative, bookkeeping, and staffing costs continue to rise in an effort to process more invoices and collect more money by the due date.

An AR tool allows you to integrate with your ERP to access data required for automating your processing. This reduces collection costs because you needn’t scale your collections team linearly as your business and invoices grow. It also saves time by eliminating manual data entries.

People have opinions. Tools don’t

To err is human but to ensure that does not happen is your responsibility as an AR manager. The mundane task of collecting payments frequently clouds judgment, resulting in poor predictions. Prioritization between customers and payment buckets fails. This results in an excess of outstanding payments. Such errors in manual AR negatively impacts your collections. Based on the payment behavior of various customers, an AR automation tool can assist in making better predictions.

Slows down the collection process, increases bad debts

Bad debts are a huge loss to any business. According to Gartner’s finance research, in 2020, bad debts across various industries increased by 26%. Every credit sale carries the risk of nonpayment. Installing a proactive credit management system can help to eliminate or reduce bad debts. Use AR automation to increase efficiency and speed up payments. Manual entries and follow-ups take time, and there's always the risk of missing a deadline, which means your receivables will now require extra effort to collect. This eventually leads to writing them off as bad debts.

Poor customer service

Traditional AR processing necessitates massive data storage, which can stymie the quick reference process. Your collections team is missing out on real-time visibility into the status of paid invoices while dealing with customer inquiries and chasing down invoices. All of this jeopardizes customer service. Contracts may be terminated as a result of this as well. With a single click, an automated AR process would provide you with the status of any account. Once the instructions are set, it sends emails as needed and stops when payment is received.

Inaccurate cash flow predictions

You need working capital to ensure continuity of your business. And this majorly comes from receivables that are considered as current assets. Every invoice raised for a credit sale might or might not bring in the money. Spreadsheets make it nearly impossible to predict how much cash is expected and how much of it is. An automated tool on the other hand can help you quickly find charts and infographics to predict your cash flows just like in Growfin.

Why does it matter to have a good AR automation system?

If you love a tidy desk, then think no more before switching to automating your manual AR process. Stressing on this won’t make much of a difference unless you understand the fruits it reaps.

  • Get better insights on your cash flow by identifying cohorts in your receivables.
  • Be on top of your aging bucket or outstanding invoices to follow up strategically.
  • Use collection strategies like in Growfin to save time, predict cash flows, and automate manual tasks.
  • Save up on adding those extra hands for the collections team.
  • Accelerate the collections process to eliminate or reduce bad debts.

Companies often only see the direct cost that comes with invoicing. This could be using multiple tools or adding more people to the collections team for processing invoices. It's time to look beyond and find the right solution to up your collections process to improve efficiency and to collect quicker and better!

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