It probably goes without saying: if you’re running a business, you need to make money.
That’s why accounts receivable management—or the process of making sure you receive customer payments correctly and on time—is crucial. It can mean the difference between a booming business and one that crashes and burns.
In this post, we’ll help you gain a solid understanding of the accounts receivable (AR) management process and why it matters that you get it right. Then, we’ll give you a few best practices to ensure your AR process is optimized for profitability, cash flow, and customer satisfaction.
- What Is Accounts Receivable Management?
- Accounts Receivable Management Process
- Accounts Receivable Management Best Practices
- Your Business Needs Proper Accounts Receivable Management
What Is Accounts Receivable Management?
Most business models allow for at least some of their sales to be on credit. The term accounts receivable refers to a business’s outstanding invoices.
If your customer has received a service or product before completing payment, that money owed should be categorized as accounts receivable until they pay. Once they pay you the money owed, that amount is then categorized as revenue.
Accounts receivable management, then, is the process of tracking, managing, and following up on the money owed to your business.
If your company sells goods or services on credit, you need a reliable process for managing your accounts receivable; otherwise, you’ll have no way to:
- Keep track of the money you’re owed
- Avoid cash flow issues
- Calculate future revenue
- Outline your predicted profits to potential investors
Accounts receivable directly impact future cash flow. Without providing credit to customers, transactions would stall, and you’d lose important customer relationships.
Properly managed AR can be a lifesaver for a business, while improper accounts receivable management can spell doom. If a customer delays payment for too long, this can easily lead to a cash flow shortage for the company.
Without a steady influx of cash owed, the business will soon be unable to pay its own bills.
Mismanaging AR can cause a cash flow shortage to be devastating to a business—especially a new or a small one.
Financing issues are among the six biggest reasons new businesses fail, on the same level as a bad business plan and a terrible store location.
And as Melissa Horton writes for Investopedia:
“Running out of money is a small business’s biggest risk. Owners often know what funds are needed day to day but are unclear as to how much revenue is being generated, and the disconnect can be disastrous.”
Therefore, effectively managing your accounts receivable is a crucial aspect of the success of your business.
Accounts Receivable Management Process
Accounts receivable management is about more than just sending payment reminders. It also involves discovering the reasons for late or missing payments, monitoring customers for credit risks, and fixing gaps in your payment process.
Proper AR management is all about strengthening customer communication and streamlining the process of payments.
The process changes slightly depending on the industry and the company in question, but there are a few factors that remain constant in successful AR management. We’ll take a look at four of those factors below.
Establishing a Customer’s Credit Rating
First, you’ll need to come up with a credit application process for new customers.
Verify the customer’s identity and run a credit check. Based on the applicant’s creditworthiness, you can then decide whether to do business with the customer on credit.
The factors involved in considering a potential customer’s creditworthiness involve on-time payments, length of credit history, and the types of credit used.
Source: Business Factors
These data points help determine how trustworthy and financially viable a customer is before you start doing business with them. If you feel uncomfortable offering credit to the customer, you can always ask for upfront payment instead.
If your business works with corporate clients, the credit check process is usually very simple. Corporate clients tend to have credit accounts, so they are prepared to present all the information you need to verify their creditworthiness.
Invoicing the Customer
Of course, your customer can only pay you on time if they know what they owe and when to pay it. That’s where invoicing comes in.
An invoice is a document that outlines the products or services provided, the costs, and the date the payment should be made. In the old days, an invoice was sent through the mail. However, these days, many consumers prefer to receive an electronic invoice instead.
In order to be paid on time, you’ll need to send invoices promptly. We recommend using an automated invoicing system to ensure no one slips through the cracks.
Regpack’s software streamlines your payment process and makes sure customers get the right invoice, with the right data, at the right time.
Our tool not only gets you paid faster, but it also:
- Avoids double invoicing and misplaced payments
- Accepts online payments for ultimate customer convenience
- Steers clear of human error by using automated data entry
- Streamlines and polishes your presentation by creating personalized invoices, reminder emails, and payment instructions
Promptly sending invoices to your customers does more than giving them the information they need to make a payment. It also facilitates transparency and a positive working relationship between you and your customer.
If the customer sees something on your itemized invoice that they don’t understand or agree with, they can call you. That way, instead of dealing with ongoing late payments due to a misunderstanding, more customers will feel empowered to get in touch and resolve the issue.
Tracking and Managing Payments
Your accounts receivable management system is only as good as your monitoring skills. Make it a point to review your receivable accounts as often as possible—daily would be best—to stay aware of all the payments due and received.
The method you use to track your accounts receivable will probably depend on the size of your business. If you have a small business, you may rely on a simple spreadsheet and manual AR tracking.
You might write and send invoices yourself, then make physical deposits of payments and record the payments in your ledger.
Growing businesses or those with a large number of client accounts, on the other hand, typically use accounts tracking software.
An automated billing solution assists with the entire payment process, from invoicing to collecting and tracking payments.
Such an automated system makes AR tracking easier by reducing your team’s workload and making more time for following up on delinquent accounts.
It also automates many procedures, such as invoicing and payment reminders, to make sure important processes never fall through the cracks.
Larger companies also usually have a dedicated Accounts Receivable Officer that oversees their receivables and ensures all payment information is properly recorded.
The officer should regularly reconcile the AR ledger to make sure there are no missing or late payments. Then, they should issue regular statements and/or invoices to the customers.
No matter the size of your company, you’ll need to do everything you can to keep your accounts receivable ledger updated regularly. If your AR ledger isn’t accurate and in real-time, it can be difficult to know if any customer payments are late or missing.
Accounts Receivable Management Best Practices
Now that you know the basic process of AR management, let’s look at a few best practices to help you save time and resources, get paid faster, and improve your customer relationships.
As you’ve probably already gathered, we’re big fans of automating your billing system as a whole. Automation is a great way to save time while streamlining processes—what’s not to love?
But when it comes to automation, accounts receivable automation is one of the most important features your company should invest in.
Automating your AR processes makes sure all the repetitive tasks—like invoicing, accepting, and tracking payments—get done promptly and accurately.
Example of automatic email sending based on set triggers in Regpack.
After all, you don’t want to mess around with the part of your business that actually gets you paid, right?
Tracking and managing accounts receivable can be extremely time-consuming; in fact, a QuickBooks study found that 65% of businesses spend an average of 14 hours per week chasing late payments.
And as their blog points out:
“Reduced cash flow due to overdue payments impacts a business on multiple levels. It inhibits a business’s ability to pay its bills, compensate its employees, and perform its regular business duties.”
AR management is crucial, but it can easily become a full-time job. That’s why it’s important to find a billing system that automates as many accounts receivable tasks as possible, such as:
- Invoicing and bookkeeping
- Dunning management (i.e., late payment reminders and other related communications)
- Tracking customer payment and financial data
With the right software solution, you’ll eliminate human error and ensure precision, as well as improve the efficiency of your team.
Create an Effective Collection Plan
Having an up-to-date and efficient accounts receivable management system keeps you informed about late invoices easily. However, if you don’t act on that information, it won’t do you much good.
You’ll need to come up with a system for dealing with payments, such as:
- How much interest will you charge for late payments?
- How many days past the due date will you charge a late fee?
- How will you get in touch with customers regarding late or missing payments?
- How frequently will customers receive communications (due date, one week overdue, three weeks overdue, etc.)?
- Do you have a template for payment reminder emails? (Hint: you should!)
- How and where will the AR team record payment communications for your records?
Develop a set of policies that works for you, and then stick to it. Once an account becomes overdue, your AR team should be able to act on your established collection policy quickly and without hesitation.
Many small business owners are afraid to be firm with customers who are chronically late with their payments. But if you don’t establish strong procedures, you’re that much more likely to run into non-payment issues and subsequent cash flow emergencies.
To maximize the chances of your customers paying on time, keep things as simple as possible.
The less you make your customers work to complete the payment, the more likely they are to do it without delay or a fuss.
One way to simplify the payment process is to accept different payment methods, such as:
- ACH payments
- Credit and debit cards
- Electronic Funds Transfer (EFT)
If you have a lot of international customers, you may want to accept multiple currencies as well.
Offering a variety of payment methods is an easy and practical way to improve your customer experience. If they see their preferred method is available (especially if they can pay via a link within their digital invoice), they’re that much more likely to make the payment right away.
Monitor Slow Payers
Finally, keep track of those customers who just can’t manage to pay their balance on time.
The occasional late payment or processing glitch can happen to anyone—but some people regularly struggle with meeting their financial obligations.
For those customers who miss due dates frequently, the risk of future payment issues may outweigh the benefits of continuing that customer relationship.
Slow payments negatively affect businesses across all industries, as seen in the Tweet below.
Source: @Data Gumbo
You may want to consider one of the following solutions instead:
- Ending your relationship with the customer
- Reducing their credit limit
- Asking for future payments upfront
After all, one goal of receivables management is to reduce bad debt and increase your profit—which is difficult to do if you have regular customers who just don’t pay.
Of course, make sure that whatever policy you use applies to all of your clients. Avoid appearing to single out specific customer accounts.
Instead, implement a regular response policy for late or missed payments. Your terms of service should include information on the penalty for repeat offenders.
Your Business Needs Proper Accounts Receivable Management
Saying that it’s important for a business to bring in money is an understatement. If you want reliable cash flow, improved revenue, and a positive customer experience, you need to track your accounts receivable properly.
The AR management process is about more than just keeping a spreadsheet of upcoming payments. It involves vetting prospective customers for credit risks, using effective invoicing strategies, and tracking and managing payments correctly.
And for the best results, you’ll need to monitor slow payers, simplify the payment process, and establish a consistent and effective collections policy.
Finally, invest in a quality billing solution like Regpack, which automates many of the repetitive—but crucial—tasks that stand between you and effective receivables management.