8 Best Practices to Improve your Accounts Receivable Management
Nov 16, 2022
Proper accounts receivable management has a significant impact on the revenue and cash flow of your business.
Done efficiently, you'll receive timely payments, happy client relationships, and high liquidity for your business. Poor management, however, can lead to wasted staff time, accounting errors, lost revenue, and poor cash flow.
Follow these 8 tips to improve your accounts receivable management and make payment collection effortless and efficient.
👉 Need a quick reminder of what accounts receivables management is and its objective? Skip to the end of this article.
1. Use Electronic Billing & Online Payments
Ditch paper, snail-mail billing, and paper checks. Those are easy to lose and time-consuming to track. Instead, switch to an electronic invoicing system that lets clients make payments easily online.
Integrate your billing and payments. This automates your record-keeping, so there’s less for you to keep track of, and decreases the chances of human error.
Use invoicing software with integrated payment processing, so clients can click right from their bill to initiate a payment, and the system can automatically record payment for you (cash application). This also lets you set up options for customized, systematic follow-up when payments are late. Your business can stay on top of collecting payments, while keeping communications tailored to each customer, without any wasted time.
2. Use the Right KPIs
To make sure your accounts receivable processes are functioning properly, keep track of these AR performance metrics:
Days Sales Outstanding (DSO): This is the top metric you want to optimize your processes to reduce. DSO is the average amount of time it takes to collect payment. Aim to keep your DSO below 30 days.
Average Days Delinquent (ADD): This is how many days on average client payments are overdue. This is another number you want to keep as low as possible. If it rises, check your processes to ensure billing is going smoothly and AR is adequately staffed to accommodate collections.
Turnover ratio: This number shows how quickly you’re collecting revenue from clients (i.e. turning accounts into cash) and indicates your cash flow. Keep this number low. A high ratio means you have a lot of open accounts with uncollected revenue — which should prompt you to revisit your billing and collections processes.
Collection Effectiveness Index (CEI): This is the percentage of accounts you turn over, or collect revenue on. You want this to be as close to 100 as possible, indicating you’re collecting payment from all of your clients.
Revised invoices: You want to avoid the need to revise customer invoices if you can. If you see a rise in your number of revised invoices over time, or during a certain period, look at your billing policies and possibly consider staffing needs to ensure efficiency and avoid errors that delay payment.
Check out our spreadsheet template to calculate crucial KPIs!
3. Outline Clear Billing Procedures
Approach your billing process with clarity and consistency. Document the process, so everyone in your company follows the same procedures.
Your billing process should include the following:
Billing periods and invoicing dates.
What information to include on each invoice (e.g. Purchase Order numbers, addresses, etc.)?
Periodic AR process assessment and follow-up.
Collections procedures for overdue payments.
In addition to the daily, weekly and monthly steps you need to follow to bill clients accurately, include in your documentation:
Billing contact information for each client.
Unique billing details or steps for each client, if applicable.
Payment details and notes for each client.
4. Set Credit & Collection Policies — and Stick to Them
You may or may not be interested in making credit available to some clients. If you do, set clear credit policies ahead of time to avoid extending too much credit to some clients. Make it easy for anyone in your business to determine whether to extend credit when a client requests it.
Similarly, clear AR collection policies ensure you can take a proactive approach to addressing overdue accounts and streamlining your workflow. Your collection policy should highly focus on proactivity rather than reactivity. Instead of chasing late payments, send multiple payment reminders before the due date (check out our payment reminder templates!).
This ‘soft touch’ approach keeps communication open between you and your customer and ensures that they are aware of any upcoming payments. Remember that every touchpoint a customer has with your business (for instance, customer success) is an opportunity for you to proactively remind them.
Another tip is if you have a customer that has accumulated multiple past due invoices, the next time you send the latest invoice, take it as an opportunity to remind them of all past due invoices. This strategy streamlines the collection process and avoids any confusion for your customers.
5. Collect Payments Proactively
With clear procedures in place, you can be proactive about collecting payments. Create a process where you’re prompted to contact a client on the first day a payment is late, so they’re aware of their payment terms and any overdue balances immediately. Make sure to clearly outline the steps on how they can make a payment.
Electronic billing and payment systems can help centralize and resolve invoicing and payment matters with your clients. For example, you can set automatic follow-ups with clients the first day a payment is late, then once each week until the account is settled.
Need help writing payment reminders? Have a look at our free email templates.
6. Set up Automations
Save yourself time and add consistency to your process by automating account communications with your clients and reducing manual processes when possible.
💡 Implementing Accounts Receivable automation software can reduce your time spent on cash collection by 80%. Check out this customer success story to find out how we did this for Gymlib.
The key to AR automation is to automate the most tedious tasks in the process. This typically includes preparing emails (reminders, follow-ups), pulling out invoices, etc. Automate anything repetitive, time-consuming, and low value added. Instead, your finance team needs to be focused on tailoring your customer communications with the right tone and sending invoices and reminders at the right time. This is what makes a difference in getting paid on time.
An account receivable management software will take care of this for you — you can set up a form email to send along with an invoice, a thank-you email to send upon payment, and reminders to send when payment is overdue.
Most companies only send a customer balance or memo without listing the outstanding invoices. It’s usually in a separate document and this is confusing for your customers. This is something that should be automated, ideally through a customer portal or receivable automation software. This clarifies what your customers owe you and when they need to pay you. Preferably, your company should be offering online payment methods to speed up this process.
If you use paper billing, you can still automate your communications to save time and streamline your process a little. Use integration software like Zapier to set up triggers to contact clients based on inputs into your records. For example, set up a form email to send to a client when you enter into a spreadsheet that you’ve received a payment. Or create an item in your to-do list to print and mail a receipt.
💡 AR automation helps collect 99% of payments within 60 days after invoice due dates. Find out here how we helped Lattice achieve this.
7. Make Payments Easy for Customers
Most payment issues you’ll encounter are because clients have trouble receiving, viewing, or understanding your invoices, or because they don’t have access to a quick and convenient payment method.
Did you know that 70% of payment reminders are technical and not commercial? So the real issue here is not about the actual transaction but the method of payment. If you want to get paid, it needs to be a straightforward thing to do. Remove any roadblocks in the customer payment experience and streamline the process. The solution? Set up a system that partially automates your AR process and makes it easy for customers to pay you. Consider adopting a payment portal that allows you to structurally communicate all the information your customers need in one go (amount due and method of payment).
There is a common misconception that late payments mean that a customer is a bad payer. This is often not the case. If your business is consistently receiving late payments, it means your invoice and payment strategy are broken. How do you fix this? Make payment extremely easy for your customers. Keep constant communications and offer easy online payment methods or instructions.
You can use an electronic invoicing system that delivers invoice information and links directly within an email to avoid triggering spam filters with an attachment. Set up easy electronic payment portals with different online payment options that let clients pay online (by using a credit card for instance) as soon as they read your invoice. Taking these steps can foster good customer relationships and avoid the non-payment of customer invoices.
8. Involve All Teams in the Process
A recent survey asked if sales teams should be involved in cash collection. The results? 90% of respondents answered no. This is surprising as this indicates that there exists a faulty misconception about cash collection. The sales team should be an integral part of the cash collection strategy as they need to ensure that the deals they close actually turn into cash and working capital for the company. This doesn't mean that they are involved in the entire collection process. Rather, the advantage is that they are in direct contact with customers at critical collection touchpoints and this needs to be leveraged.
The misconception of payments being a technical one-step process and is only the finance team's responsibility needs to be challenged. In reality, efficient cash collection is multifaceted and requires the intervention of different departments. Making all client-facing teams, including, for example, the sales team, privy to the process helps keep everyone on the same page and part of the management process of AR. It increases efficiency, avoids redundancies, and eliminates mistakes that could waste time or profitability.
These teams should be involved in this process not only because getting paid is central from a business perspective but because it is a strong indicator of the quality of goods or services your company is providing. It is a qualitative approach, as each stakeholder will have a different and unique relationship with your customer and will be able to tailor their approach accordingly to get paid on time.
If you are not getting paid and it is not a technical issue, chances are that there might be a larger underlying issue in your process. This is when you can leverage your sales and success teams that have direct contact with customers to help identify the root cause and find a solution. The key takeaway here is that cash collection needs to be collaborative. What this really means is that each stakeholder from different departments plays a key role in the process and that no one team is responsible for the entire process.
Want more tips to take your A/R management to the next level? Check out our free guide!
AR Management Automation Software
Using software for accounts receivable management can streamline your process and automate tedious tasks that waste your staff’s time and leave room for errors.
At Upflow, we provide solutions to help you collect customer payments effortlessly and efficiently.
Through our system, you can set up automatic, personalized reminders to send to customers when invoices are overdue. Plus, let them pay you via wire transfer, direct debit, credit or debit card — online, through an instant or scheduled payment, so they can settle up right away.
We’ll also help you keep track of your KPIs with simple financial reports, and keep your sales and finance teams in the loop with communications, dashboards, and tasks to help everyone keep track of their receivables.
Should You Outsource AR Management?
The alternative to setting up your own processes and software in-house is to outsource AR management to an accounts receivable management service.
That would free up your time to focus on other aspects of the business. But it would likely cost much more to pay a service provider than your own staffer or contractor, or simply use software in-house.
The other major drawback to hiring a service is a lack of transparency. Most companies outsource AR management for the wrong reasons. These reasons are that it’s time-consuming, it’s a complex and tedious process that businesses don’t want to handle it. By making this mistake and removing the operational complexity, you are also losing out on the opportunity to create and foster a strong customer relationship. Your customer relations are extremely valuable. It also disconnects your communication with your clients, making it more difficult to maintain relationships as well as handle payment issues when you need to.
Sometimes it might be the right move for your company to outsource AR but ask yourself if you are doing it for the right reasons. If you are outsourcing only because of the operations of AR then this is a mistake. Instead, opt for using specialized AR software that will keep this process internal and will do most of the heavy lifting of the collection process thanks to automation. Keeping AR internally ensures you are adding value to your customer relations, and you are sending invoices and reminders at appropriate times and to the right points of contact. External AR management simply does not have the insights that you have in your own business and will likely fail at providing the right service and keeping good relations with your customers. Outsourcing accounts receivable also makes it harder to facilitate communication among your teams to keep everyone in the loop about their clients.
Keep in mind that if you think that outsourcing your AR management will solve the issue of collecting unpaid invoices then you are wrong. The issue often lies internally and only you can fix this within your business. With that being said, if you do choose to outsource AR management, make sure you are using collaborative software so that different team members can easily pick up at varying touch points throughout the collection process. Software like Upflow for instance centralizes and tracks real-time customer payment timelines and cash applications. It allows the intervention of any team member at any time when necessary.
Remember that even if you outsource your AR management someone from your business will always have to get involved. AR management can be a tedious process but it’s not something that you will completely be able to outsource.
The main purpose of accounts receivable management in your business is to maximize your cash flow while minimizing costs and maintaining good client relationships.
Moving to electronic billing and payments is a vital step to streamline customer payments.
Set up automated workflows with AR software to free up your finance team's time to focus on higher value-added tasks.
Stay on top of your key AR metrics. They’ll indicate if your collection strategy is performing well and will help you identify what improvements you can make. Dedicated AR software can help you track these metrics in real-time. Try out our Discover plan for free.
Cash collection is a cross-team effort. To maximize customer payments, leverage your sales and customer success team's unique customer touch points for payment reminders and follow-ups.
Outsourcing AR management will not necessarily fix your business's problem of not getting paid. The issue is often linked to your process and only your business can fix this internally.
What Is Accounts Receivable Management?
Accounts receivable (AR) is any money your clients owe your business. Accounts receivable management is the system of processes you put in place to track that money, including:
Billing and invoicing.
Communications with clients.
Internal communications and processes.
Collections processes and credit policies.
Accounts receivable staff work closely with sales and finance teams and are typically responsible for collecting revenue, recording transactions, verifying payments, and resolving discrepancies on accounts.
What Is the Objective of Accounts Receivable Management?
The goal of effective accounts receivable management is to optimize your billing, payments, and collections process to minimize the time it takes to get paid and eliminate the risk of bad debt.
AR management includes creating and following standards and practices for your business to facilitate efficient billing and payment for your clients. Doing so means getting paid on time and avoiding late payments.
Need help getting paid on time? Have a look at our free guide with tips to improve your A/R management!