Creating an effective accounts receivable (A/R) management strategy is a critical part of running a successful business. Yet, many business owners fail to take a systematic approach to the situation, which can be detrimental.
Why Optimizing Your Accounts Receivable Matters
Like many business owners, you may not see the benefits of optimizing your accounts receivable processes immediately. However, doing so can enhance many aspects of your business. It prevents the depletion of current capital, which increases liquidity. In turn, businesses are better able to reduce debt, lower costs, and finance growth, often outperforming competitors in the process.
Common Issues in Accounts Receivable
Business owners often overlook accounts receivable; however, poor accounts receivable practices can cause numerous problems for companies. From extending credit to unqualified customers to failing to follow up on overdue accounts in a timely manner, bad practices drain time, money, and productivity from the business.
Key Improvements in Accounts Receivable Processing
Improving accounts receivable processes may seem overwhelming at first. However, by taking a systematic approach to the situation, you can implement changes that will lead to quick and noticeable improvements. The following five business activities, when properly optimized, will enhance the overall accounts receivable function and produce additional benefits for your business as a whole.
Maintaining Accurate Customer Data
Centralizing the customer data process to ensure accurate customer account information is vital for creating and maintaining an efficient accounts receivable process. For example, inaccurate addresses can lead to invoices being sent to the wrong place, resulting in delayed payments. Customer accounts should be reviewed regularly for discrepancies such as unusual or inappropriate payment terms, credit limits, discounts, and similar issues. Changes to customer data must be properly documented, and controls should be in place to prevent unauthorized individuals from accessing or editing this data.
Establishing a Clear and Concise Credit Approval Process
Business owners often fall into detrimental credit habits to boost sales. While extending credit can be beneficial, a process for doing so should be established and followed. This should include clear guidelines on when and how to assess and exceed credit limits, when to place accounts on hold, and how the application process works. Regular reviews of the credit approval process should be conducted over time.
Creating an Effective Invoicing Process
The customer invoicing process must be accurate and streamlined to be effective. Pricing errors, measurement units, and similar mistakes can cause chaos. Additionally, invoices should be generated and sent promptly, and the method of production should be consistent and well-defined. The invoicing process can be improved by optimizing it as much as possible. Use exception reports to identify problematic accounts. If feasible, set up a customer portal to offload some work to customers while giving them a sense of autonomy.
Enhancing the Cash Application Process
When payments arrive, they must be applied correctly. They should be applied to the correct customer and the appropriate invoices. Otherwise, if disputes or issues arise later, it will be challenging to identify the initial problem. Payments should also be applied promptly to ensure that at any given time, you know which accounts are current and which are overdue. The process can be improved by offering a limited number of payment options for simplicity. Send accounting constraints quickly and ahead of deadlines. Whenever possible, avoid throwing cash into suspense accounts until you have time to determine where it should genuinely go.
ImproveCollection Process
Properly improving accounts receivable makes it very easy to collect payment in a timely and effective manner. When payments are applied correctly, for example, it becomes easy to identify accounts that are at risk of going into default. Collection efforts should be consistent and systematic. A clearly defined process should be established to negotiate payment plans to ensure they align with the overall goals of the company.
Conclusion
You don’t have to start from scratch to improve and optimize your accounts receivable. You can choose to tackle one area at a time, or you can dive in fully and refresh them all at once. Either way, any steps you take towards improving your accounts receivable will be rewarding in the long run.
FAQs
What increases accounts receivable?
Accounts receivable is the amount owed to a company by its customers. An increase in accounts receivable can mean increased sales and more credit extended to customers. A decrease in accounts receivable means that the amount owed to the company by its customers is less, usually because the company has received payment and turned the credit into cash.
Why is it important to reduce accounts receivable?
Reducing accounts receivable means the company is converting its sales into cash, freeing up capital for growth, adding liquidity, helping to reduce debt and cut costs, and making the company more competitive.
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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts in our articles. Read our editorial process to learn more about how we fact-check and maintain the accuracy, reliability, and quality of our content.
Deloitte. “Strategies for Optimizing Your Accounts Receivable,” page 5.
Oracle Netsuite. “Accounts Receivable Turnover Ratio: Definition, Formula & Examples.”
Source: https://www.thebalancemoney.com/top-strategies-for-improving-accounts-receivable-4018880
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