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Tips for improving your accounts receivable processes

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You need an effective management strategy for your collections or your account receivables (AR) if you want to run a successful business. Unfortunately, many businesses fail to apply a methodical approach to their past due accounts and bear the worse for it. For instance, majority businesses are either not aware or are suspicious of invoice factoring, a process by which you can sell hopeless AR cases at a discount.

Sometimes, offloading deadbeat accounts is the only way you can move forward. But, this guide is more focused on ways for you to avoid such pitfalls and recover what is owed to you well in time.

Accounts Receivable Challenges

AR practices are often pushed to the back burner by the executive team. However, lack of revenue is just one of the things that can go wrong with poor AR practices. Not having a well-thought of AR strategy can suck money, time and productivity from a business. A prime example of a lacking AR process is extending credit to undeserving customers or not following up with those who are already past due.

Such practices can produce a ripple effect touching every aspect of an organization. Fortunately, most impending problems can be avoided by making changes to the existing AR process. For instance, you could set periods, such as 60 days or 90 days to qualify an account for invoice factoring.

Common AR-related problems include:

  • Not paying attention to invoice and bill accuracy
  • Improper allocation of cash payments
  • Failure to analyze data
  • Not generating reports for foreseeing potential issues

Any of these missteps can cause potential problems in your organization. This makes it necessary to take rectification steps as soon as possible.

Benefits of Optimizing Accounts Receivable Processes

Most businesses fail to notice immediate benefits from proactive utilization and optimization of best AR processes. However, you can drastically improve almost all aspects of your organizational functions by implementing a strategically planned AR process. For starters, you can always prevent your company’s capital from wasting away on unpaid recovery. This will eventually increase your company’s liquidity and reduce costs and debt. This alone can translate into outperforming the competition in many cases.

Steps to Improve Accounts Receivable Processes

It is important to understand that AR optimization cannot be implemented in a day. Also, these processes need to be started early. For instance, you could discuss payment terms or bring a new customer on board with automatic electronic payments early on. These six steps can help you optimize your AR processing and ensure that your business has fewer past due clients.

  1. Accuracy of Customer Data

Your accounts receivable process is only as good as the data you have. Without centralizing the master data and ensuring accuracy of all client accounts, you cannot expect to streamline the AR process. This involves ensuring and maintaining an effective database of all customer records. Consider this – if you don’t have the right address on file, you could be mailing the invoices to the wrong address. This will lead to late payments and cause the due amount to become too large for a customer to pay off in one go.

  1. Credit Approval Process

The next step is to establish a concise, clear and straightforward credit approval framework. Many organizations slip into offering credit to unqualified customers in a bid to boost sales. These detrimental credit habits will eventually hurt your AR score. You are also opening your organization to a vicious credit cycle which will only lead to disastrous results. It is important to understand that extending credit may be good in a few cases. However, there needs to be a specific process in place to do so.

  1. Effective Billing Process

The only way you can have an effective billing process is if the data is accurate and streamlined. No business can afford errors when it comes to invoicing. You need to fill in the correct units of measure and pricing if you want the bills to get paid. In addition, it is necessary that bills be prepared in a consistent and defined manner and sent out timely.

A great way to improve the billing process is to automate a major part of the process. Many organizations are opening up to technology and you should too if you haven’t yet considered it. Don’t shy away from using exception reports for locating troublesome accounts.

  1. Correct Payment Application

It is important that you apply the payments correctly upon receipt. You need to match the payments to the right customers and appropriate invoices. Otherwise, you are looking at a horde of disputes and issues later on. Also, it may get difficult to pinpoint the exact problem at a later stage. It is vital that all payments get applied as soon as possible to the right account. This will always keep you updated with receipts and problematic accounts.

A great way to optimize the payment application process is to limit the number of payment options on offer. However, this could make it difficult for your customers to pay on time. Make sure you don’t get in the habit of dumping cash in suspense accounts. Keep a policy in place to clear out the suspense account and have the appropriate accounts credited quickly if you really have to.

  1. Optimized Collection Process

Your payments collection can become more simplified by properly optimizing the AR accounts. For instance, when payments get applied timely, you can easily determine the accounts that are at a greater risk of defaulting. Make sure your collection efforts are always methodical and consistent. Try automating the majority of the processes to reduce the risk of human errors.

  1. Invoice Factoring Process

Sometimes, it’s easier to just cut your losses and take whatever you get. You need to set up an invoice factoring policy wherein you sell hopeless AR cases for a portion of the revenue. You can either receive a loan from an invoice factoring service or sell them to collection agencies. This is paramount if you cannot wait weeks or months to infuse the extra cash in your business. This is the recommended approach for organizations that have ongoing operational expenses but work with long net terms.

Best Practices for Improving AR Processes

APQC or the American Productivity and Quality Center have established ‘Open Standards’ for optimizing the AR process. These are the 8 most important standards from the APQC Open Standards.

  1. Streamline Receipts

It is important to eliminate all obstacles to receiving payments. For instance, you could ask your customers to ascertain which payment options work for them. This will help improve the payment experience for your customers and make it easier for them to always pay on time.

  1. Keep Credit Management as a Priority

Don’t keep stringing along sales figures by extending credit to unqualified or undeserving customers. This strategy has been known to backfire multiple times in the long haul. Create an efficient credit management process to deal with any potential problems arising out of extending credit.

  1. Analyze Accounts Receivable

You need to establish a schedule for assessing and monitoring your AR accounts. It is recommended that you take care of it at least once a week because the sooner you identify errors, the quicker you can take care of them.

  1. Shorten Payment Terms

You don’t need to extend a 30 day payment term. You should consider shortening the payment terms since it prompts customers that like to wait until the due date to pay sooner.

  1. Resolve Disputes

Consider creating a billing dispute resolution process with specific guidelines. This will help streamline the entire process and improve customer experience. It will also allow your team to know exactly what to do in a dispute.

  1. Consider Automation

While all processes cannot be automated, technology has advanced enough for you to automate a fair share of the processes. Look into different forms of technology and forms of software to automate as many AR processes as you possibly can. You can reduce human errors to a considerable degree by removing the human element.

  1. Collect Proactively

Collections should be a top priority for any business. Establish concise, straightforward and clear collections strategy. It is recommended that you plan for proactive interventions at an early stage before an account defaults. Your team should know which steps to take when an account enters the past due column. You should also have guidelines for invoice factoring in place for accounts that are hopeless.

  1. Use Electronic Billing

If possible, start billing your customers electronically. There are always a few who cannot be billed electronically, but you would find that most customers are on board with it. It is easier to process electronic bills and payments. You also get to make the entire process more accurate and quick.

There are several ways for you to optimize on your current accounts receivable processes and improve your collections. With these tips you can prevent having to implement invoice factoring to a major degree. You can use these optimization strategies at one go or pick and choose to revamp one area at a time. What’s important is that you take the first step in improving your AR processes.

augusta free press
augusta free press