Accounts Receivable Management
Steven’s business is booming. Customers have been flocking to buy his products, and he’s been building a good reputation with the consumers. He’s decided that he’s ready to cast a wider net when it comes to clients and wants to do this by offering a new payment method: credit. Now, it can be a risky play if Steven doesn’t understand his accounts receivable. Not everyone is great with credit, and some people might make this new offering a hassle. Luckily, Steven talked with a DCG consultant to learn all about accounts receivable management.
What is Accounts Receivable Management?
Let’s start with a basic understanding of accounts receivable management. AR management involves monitoring and tracking the funds owed to a business for a service or product that has already been provided. Simply put, this is largely going to be tracking purchases made on credit. This is a crucial component in financial management as it improves the efficiency of business operations and minimizes the risk of bad debt. Understanding that is just the tip of the AR iceberg. Today, we’ll discuss how to improve accounts receivable collections and management and what steps to take to ensure their effectiveness in your business practice.
But what goes into accounts receivable management? It boils down to a few key tasks like billing and invoicing, setting credit limits and policies, payment processing, and communication with clients.
Common AR Management Complications
It’s a common misconception that a mishandling of accounts receivable is largely due to late payments or days sales outstanding (DSO) when, in actuality, these are the result of poor AR management. Miscommunications (or lack of communication) between your business’s accounts receivable teams and the clients, manual accounts receivable processes, and a lack of data lead to DSOs, late payments, and bad debt. Let’s take a deeper look at these complications.
Bad communication in any capacity, business or otherwise, leads to chaos, mistrust, and frustration. No one likes feeling misled. And so, transparency about the receivables is critical to having good AR management. To avoid this, you should keep all payment records detailed and properly documented to ensure the client knows what they owe, when they owe it, and when the payment has been received. Implementing good communication practices can only improve business operations and has the potential to reduce DSO for small businesses.
We’ve said it before, and we will say it again: manual input and recording of data create an opportunity for human error to occur. It takes up time, and one incorrect input can cause miscommunication, delay payments, and unproductive and ineffective client payment follow-ups. Automated accounts receivable management can improve the business’s efficiency.
Of all the complications to accounts receivable management, a lack of data is one of the more difficult ones to manage. AR teams have to work through a slew of documents, records, and accounting tools to find everything needed for an accurate assessment of outstanding accounts receivable. Without real-time data, AR teams can’t accurately advise the sales team and collections department about credit terms or outstanding accounts. If there isn’t accurate historical data, then issues have occurred with outstanding payments and payment issues customers have had. Keeping data accessible and accurate will minimize miscommunication both internally and externally.
AR Process Improvement Strategies
Automate your AR Collections and Management
There are many things you can do to improve your accounts receivable collections and management. First and foremost, using automated accounts receivable solutions for billing, payment tracking, and AR management is critical. The best practices for AR management are going to require up-to-date data, accurate records, and timely communication with your clients. By automating these processes, you’re minimizing the risk of miscommunication, streamlining invoicing, reducing your average DSO, and improving efficiency.
Simplify.
Simplifying your billing invoices and outlining a clear billing procedure for your clients will make paying for your business’s services that much more efficient. This sets the expectations for all your clients and your AR management team. This will cut down on confusion as your clients will know what they need to pay, and your AR team will know how to bill them.
Be Meticulous When Extending Credit
Extending credit options to customers creates a new payment avenue for your business. Understanding your client’s creditworthiness will help you assess and mitigate risk. Credit-based payment doesn’t have to be a liability if you understand your client’s spending habits and financial history. Going hand in hand with that, when you set a credit policy, stick to it. This will help prevent overextending credit clients and set the expectations for payment at the time of purchase. When the time comes to collect, be proactive! Send several reminders about the upcoming payment date and communicate with your client. Not only will this build trust between your business and the customers, but it will also help keep your data accurate and up to date.
Refine the Dispute Resolution Process
When it comes to credit-based payments, especially in the age of digital payments, disputed transactions are going to happen. Your business should be prepared for when it happens. Resolving these conflicts in a timely manner can only improve your business’s reputation, build lasting customer relationships, and contribute to the good financial health of the business. But how should you go about this? Outline and structure your dispute processes with your AR management team so they know who is responsible for what and how to go about settling a dispute with a client. Document everything. If you have a way for your team to log and track disputes, you are better equipped to handle them as they occur.
Accounts receivable management doesn’t have to be stressful or time-consuming. Our team is ready to help you with questions and to get you paid. Schedule a free consultation with one of our consultants today to see what AR management strategies are right for you.
