Maintaining an efficient and effective accounts receivable (AR) management system is very important to a company's financial health in today's increasingly competitive business environment. The ability to manage invoices, process payments, and mitigate the risk of bad debt undeniably impacts an organization's bottom line. Done efficiently, you'll receive timely payments, happy client relationships, and high liquidity for your business.
Follow these 7 tips to improve your accounts receivable management and make payment collection effortless and efficient.
1. Establish A Credit Policy
Most successful companies have well-defined credit policies that specify the types of customers eligible for net terms and those required to settle their accounts in full immediately. By establishing a credit policy and ensuring your employees and customers are aware of it, you can decrease the chances of giving credit to customers who are unlikely to repay.
2. Use Electronic Billing & Online Payments
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. This also lets you set up options for customized, systematic follow-up when payments are late.
3. 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.
4. Determine Procedures for Following Up on Late Payments
Since it’s safe to assume that at least some of your customers won’t pay on time, your AR management policies should incorporate a comprehensive plan outlining how your accounting team should address late payments. For instance, your policy could direct the AR team to email accounts with overdue payments one week after the due date and again the following week if no payment is received. If two emails do not yield a response, a team member should make a phone call to the account one month after the payment is due, informing them of the delinquency.
5. Regularly Review Past-Due Accounts
Your organization should regularly review late payments so that the AR management team and other executives stay updated on the status of receivables. Rather than being surprised by late payments, initiating a regular internal review, such as a monthly meeting, ensures everyone remains well-informed about the financial situation. By consistently monitoring past-due accounts, stakeholders can be prepared for any fluctuations in cash flow and adjust strategies accordingly, allowing for better financial planning and minimizing unexpected late payment issues.
6. Track KPIs To Measure AR Efficiency
A simple way to continuously optimize accounts receivable management is by tracking key performance indicators (KPIs) with an ongoing focus on improvement.
Consider tracking AR performance metrics such as:
• Days sales outstanding (DSO): the average time it takes to collect payment.
• Average days delinquent (ADD): the average number of days customer payments are overdue.
• AR turnover ratio (ART ratio): the number of times customers pay invoices during a specific period.
• Collections effectiveness index (CEI): the percentage of accounts your business collects revenue on.
7. Automate Accounts Receivable
AR automation solutions give organizations real-time visibility into their cash inflows. A smart AR platform connects your systems with ERP, CRM, and billing software and provides easy-to-read dashboards in one centralized platform.
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