When a company struggles to collect accounts receivable (AR) from the clients who owe for the products and services they received, it ties up the company’s cash flow. To get paid, the AR team sends payment reminders, dunning notices, emails, and phone calls which can be manual an onerous. The issues escalate when the AR team sends invoices with errors, frustrating clients and further delaying receivables. Traditional workflows increase the risk of cash flow inconsistencies and may damage the client relationship. Improving AR collections requires going beyond tweaking manual cash flow processes. This article will discuss best practices to improve accounts receivable collections and highlight the benefits of AR automation to manage collections.
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What is accounts receivable collection?
When a company sells its products or renders services to its customers on credit, the amount that is yet to be collected is accounts receivable. To ensure customers settle their unpaid invoices, the accounts receivable team is responsible for collections. They create invoices, remind customers, and send dunning notices to request the payments due for their invoices to settle the debt.
The longer it takes for a company to get paid, the higher the days sales outstanding (DSO) which means the negative financial health of a business. For a company to have a healthier cash flow, it must manage the collections efficiently.
Why accounts receivable collections is important for a business?
Collecting accounts receivable is important because cash is the blood of a business. Without efficient cash flow, a business cannot manage its expenses or pay its employees. Inefficient processes bottleneck collections that result in loss of business and reputation. Though large businesses can withstand some delayed payments, unpaid invoices can severely affect any business’ cash flow and administrative costs.
On the flip side, companies with efficient accounts receivable collections processes can reinvest cash to generate profit and business growth. In addition, it saves companies from cash flow disruptions and reduces the risk of delinquent accounts.
How can businesses manage AR collection?
Managing accounts receivable collections requires overcoming common challenges that impede cash flow. Some of the common challenges include traditional paper-based invoices that take time to prepare and reach customers. Data handling on independent spreadsheets and a lack of centralized solutions lead to data inconsistencies, taking more time and effort to create reports. Without an intelligent solution, all these issues contribute to a cash flow bottleneck, and your business will suffer from financial strain.
A business can manage accounts receivable efficiently by implementing effective AR collection strategies. Creating invoices effectively, developing a receivable policy, and sending payment reminders are common strategies to manage collections effectively. These strategies will ensure prompt collections of receivables, making cash flow efficient.
Accounts Receivable Collections Best Practices
Efficient accounts receivable collection practices result in healthier cash flow for your business and strong merchant-customer relationship. It also leads to higher liquidity, to better utilize cash for a stable business. Following are the best practices to speed up AR collections and improve your cash flow.
1. Digitize Invoicing Processes
Traditional invoicing methods are tedious and difficult to track, lacking efficiency and customer convenience. Paper-based invoices are highly error-prone, which often leads to invoice disputes. Sending paper-based invoices to customers often leads to a negative customer experience and makes it difficult to pay invoices. Simplifying this process makes your invoicing process faster and lets clients make payments easier. When your invoices are digitized, it is easier to track customers who have paid them. Using electronic invoices decreases the chance of human error, reducing invoicing disputes and getting paid faster. With the electronic invoicing method, you get paid on time, making your cash flow steady.
2. Set and Measure KPIs
Key performance indicators (KPIs) are essential measures to determine the financial health of the company and track accounts receivables. By setting benchmarks and monitoring metrics over time, you can determine whether your company’s financial health is stable. Following are some of the essential KPIs to aim to improve AR collections.
- Days Sales Outstanding (DSO): Improving your accounts receivable collections is often determined by DSO, which is the average number of days it takes to collect customer payments. The longer it takes to collect payments, the higher the DSO and reduced cash flow. Though DSO’s value is industry-dependent, an ideal value will be under 45 days.
- Average Days Delinquent (ADD): Once the customer gets the invoice, the days it takes to pay it is referred to as ADD. Make sure to keep this low as much as possible to boost cash flow efficiency.
- Turnover Ratio: This ratio determines the efficiency of collecting your receivables. A higher turnover ratio indicates uncollected revenue. Thus, this ratio needs to be low. To manage this ratio, you must revisit your invoicing and collection processes.
- Invoice disputes: To maintain cash flow efficiency, you need to reduce the number of invoice disputes and revised invoices. The higher the number, the longer it takes you to get paid. By keeping a check on this number, you can improve your payment efficiency.
3. Strategic Collection & Follow-up Policies
Customers often miss the payment due dates or fail to pay due to cash issues. For you, it is a current asset that is stuck, and cash that the business cannot access. Formulating a strategic collection policy will strengthen your credit application. This policy should aim to prevent late payments from customers and must be adhered to effectively. The collection policy must outline the steps and payment modes customers can use to pay invoices. As per the collection policy, any potential penalties must also be highlighted in case of late payments.
You can improve your collections further with a follow-up policy to remind customers to pay and increase your collection rate. Depending on the industry and your relationship with your customers, you can email or call them for a friendly reminder. Sending dunning emails with embedded payment links is another strategy to get payment directly into the account instead of checks.
4. Invoice Customers Immediately and Maintain Communication
Your business will have the best chance to get paid when you immediately issue customer invoices. Sending error-free invoices will help you get paid on time. However, invoices with errors will lead to further delays in collections, necessitating revision. Businesses need to send gentle payment reminders to customers to settle invoices. Failure to remind your customers will further delay your receivables. The best practice to overcome this challenge is communicating clearly with your customer and inquiring about the reason for delayed payment. This practice will help maintain communication and strengthen the merchant-client relationship.
5. Elevate Customer Experiences
To ensure the trust and loyalty of the customers, elevating customer experiences is a prerequisite. While keeping your books consistent, make sure not to unduly send aggressive dunning notices, as they will frustrate customers, and possibly lead to customer attrition. For a smooth invoice-to-cash lifecycle, send personalized reminders and dunning notices to enhance customer experiences. Allowing your customers various payment methods will help you get paid faster and improve their experience. If your clients are delaying due to cash flow problems, reconsider payment plans to accommodate their business concerns to improve the invoice-to-cash experiences of customers.
6. Offer Prompt Payment Discounts
One of the best practices to improve accounts receivable collections is to offer prompt payment discounts to your clients as an incentive to pay early. For instance, you can offer your customers rewards and cash discounts to encourage timely payments. This practice is viable if your business is suffering a financial strain to get paid promptly with a discount than a delayed payment. Encouraging customers with an upfront yearly payment discount is another strategy to secure more cash for your venture. This will save you from chasing invoices every month. Together, offering early payment discounts and incentives will help you avoid late payments and speed up your cash flow to improve the overall financial health of your business.
7. Enhance Involvement of AR Team
Maintaining collections of accounts receivable and following up with customers to pay invoices is a challenging job for the AR teams. Without automation, the AR team has to prepare invoices manually, generate reports, and resolve invoice disputes to meet the expectations of businesses and customers. To sustain accounts receivable collection management and customer satisfaction, you must keep close communication with your AR team. Improving collaboration enables you to prioritize which customers to chase while keeping customers on the same page to preserve cash flow.
8. Automate Your Workflows
Manual systems are less efficient and prone to human error, bottlenecking collections and keeping the AR team captive. Using AR automation software will automate manual administrative tasks, reducing the time and effort of the AR team and streamlining collection processes. By automating workflows, you streamline invoices, reminders, collections, and payment processing to reduce many pain points that impede cash flow. This will improve your collection rate and your organization’s bottom line.
Eliminate invoice delays!
The Benefits of Automating Accounts Receivable Collections
The accounts receivable automation solution will add value to your finance department to reduce manual workflows and unleash your cash flow. Embracing automation will alleviate the burden of your AR team and streamlines invoicing, collections, payment processing, and other processes. This will replace paper-based invoices, eliminating manual touch points and decreasing the DSO, turnover ratio, and invoice disputes.
The AR automation platform comes with a dashboard to gain better visibility to track invoices, aging AR, and incoming payments. Using an automation platform will also automate communication that includes payment reminders, dunning messages, and thank you notes without human intervention. This automation solution will accelerate the invoice-to-cash cycle, saving resources and improving the efficiency of your accounts receivable.
Using Cadency to Improve Accounts Receivable Collections
Investing in Cadency to improve your accounts receivable collections will eliminate the hassle with manual workflows and reduce the likelihood of late payment. Using Cadency prevents data entry errors, invoice disputes and data silos, so you can access a single source of truth platform with accurate information. It also eliminates communication gaps by automating follow-ups, payment reminders, and dunning messages that can also be customized for a personalized customer outreach strategy.
Final Word
Accounts receivable collection management is vital to settle debt with clients who have not paid for the products or services they received. During the process, companies send invoices to customers to get paid on time to manage their cash flow, and maintain their financial health. Collecting payments manually is tedious for the AR team and prone to human error, slowing down cash flow. Automating accounts receivables resolves those challenges and unlocks cash flow while also improving customer experience and preserving a company’s financial health.
Using Cadency will implement AR automation best practices by automating the entire order-to-cash process and allowing customers to pay using their preferred payment method. If you already have an ERP system or accounting platform for collections, integrating with Cadency will sync your invoices, customer information, payment history, credit notes, and taxes. Alternatively, you can book a demo with our team to find out how the solution works for your industry.
