Why Accounts Receivable Management is the Most Underrated Lever for Business Growth
It’s not uncommon to find businesses without a proper accounts receivable management system. The problem? AR management is undervalued and as a result businesses often make the mistake of having no AR management at all or using outdated tech.
What Does it Mean to Manage Accounts Receivable
Accounts receivable (AR) is the lifeline of a working capital management system for any business. Managing AR means having in place a system, policies, and procedures to streamline the accounts receivable.
We all have heard that liquidity often proves more critical for a business than profitability. Accounts receivable directly impact a business’s liquidity. Yet, we see so many businesses undermining AR as a key metric for business growth.
An effective accounts receivable management system means:
- Having in place effective policies and procedures
- Using the right technology for AR management
- Having a systematic approach towards collections
- Creating a strategy for delinquencies
- Communicating effectively within the organization and with the clients
Common Mistakes Companies Make When Managing Accounts Receivable
There are some common pitfalls that most businesses fall into when it comes to managing accounts receivable e.g ignoring the AR management or deferring it until it becomes a nuisance.
Let’s look at the five most common errors:
Mistake #1: No AR Policy
Accounts receivable management is not a one-time task–it requires constant maintenance and intentionality. Despite this, many businesses do not articulate a formal AR policy. That means companies have no internal controls and unexplained procedures.
Mistake #2: Inefficient Technology
Going digital for modern businesses has become inevitable. However many companies are still using excel to manage their AR. Some companies use accounting software to gain cash flow visibility, but lack a way to properly manage invoices.
Mistake #3: Ineffective Communication
Another grave mistake firms make is that they fail to communicate clearly with both internal stakeholders and clients. This leads to uncertainty about what actions have been taken on which accounts and confuses the client. This chaos results in inefficient cash collections and bad customer service.
Mistake #4: Extending Credit to Unqualified Customers
A common mistake made by many businesses is to extend the credit facility to unqualified customers. Why? They don’t know which customers are qualified because they lack data insights and visibility into client behavior. This not only affects the liquidity of the business, it deprives the qualified clients as well.
Mistake #5: Inaccurate Records
A lack of technology and proper tools leads to errors and omissions on invoices. These inaccuracies lead to customer disputes and constant back and forths that drag on the cash collection period.
Optimizing the Most Underrated Lever of Business Growth – Accounts Receivable
Optimizing the accounts receivable management revolves around two key aspects for any business.
- Create An Accounts Receivable Policy
Formulating a formal AR policy will lead to clarity as you put in place effective internal controls and procedures. A clear policy means your business stays proactive with cash collection and client relationship management.
Businesses are often reluctant to invest in AR management systems because they fail to see the value of having both an accounting software and an AR management system. However, acquiring the right technology can improve revenues, reduce reliance on debts, and accelerate cash collection. It also makes life easier for your Account Owners.
Best Practices for Managing Accounts Receivable
Strategizing the accounts receivable management is the first step towards success. An effective action plan and best practices can ensure your accounts receivable management stays on top.
Here are six best practices for managing accounts receivable.
- Automate, Automate, Automate
Start using accounting and invoice software. Automate your invoices and billing reminders to your clients. Automation will speed up your cash collection, reduce errors, and improve client relationships.
- Prioritize Credit Policy
Set up a clear credit policy. Do not extend the credit terms to unqualified clients just to increase sales because it will bite you in the long run. You also want to track credit limits and client credit behavior.
- Accept Electronic Payments
Make it easy for clients to pay. If you can, start accepting invoices electronically. This removes any payment friction and helps you collect faster.
- Improve Communication
Engage your AR staff regularly on set policies and procedures to make sure your policies still make sense and that everyone understands what they are. Also, make sure your clients are getting the right information from your business. Clients should be able to reach you easily to ask questions, raise concerns, and understand their balances.
- Track the KPIs
A pivotal task for AR staff is to use the right Key Performance Indicators (KPIs).
- Days in Sales Outstanding
- Average Receivable Days
- Cash Conversion Cycle
- Days in Delinquency
- Collection Effectiveness Index
Learn more about key metrics here : (Link to AR article)
- Outsource Delinquent Account Collections
It’s inevitable to find delinquent accounts in accounts receivable for many businesses. At this stage, it’s wise to outsource the invoices to collection agencies that specialize in the task.
How Peakflo Can Help
Realizing the importance of AR management is the first step in the right direction. You can then formulate a comprehensive AR policy and set procedures accordingly.
You may need to arrange the right tools for your AR department. It’s worth investing in a system that will keep your cash flows flowing.
Peakflo increases transparency, giving you full visibility into your accounts receivable status. The comprehensive tool streamlines collections by:
- Automating payment reminder with workflows
- Providing credit limit overviews with the Credit Control Report
- Enabling customer electronic payments with the Customer Portal
- Tracking relevant metrics on our dashboard
- Pursuing delinquent accounts by issuing Letters of Demand on your behalf