Most companies operate on credit. But there’s always a risk that some customers may miss the due date and fail to pay the invoice. It affects your cash flow. It is where efficient accounts receivable management becomes crucial. An accounts receivable management system helps you navigate these challenges. It ensures both credit management and customer relationships. It also allows timely customer payments.
AR management is critical in running a successful company. Ensuring your company receives payment for goods provided is essential. It helps maintain a healthy cash flow. Implementing best AR management practices can help companies improve their cash flow. It also reduces the risk of late payments. This article deals with account receivable management services. It also explores its definition, examples, and management tips.
Accounts Receivable
Accounts receivable is abbreviated as AR. It refers to the amounts owed to a company by customers. It also refers to the amount owed for goods or services on credit. It represents a critical component of a company’s current assets. It also plays a pivotal role in its financial stability. Accounts receivable can encompass a wide range of transactions. It is from outstanding invoices to pending payments. After all, these can vary in due dates and payment terms.
Types of Accounts Receivable
Accounts receivable can be categorized into two. It involves trade receivables and non-trade receivables. Each type has unique characteristics. After all, they have implications for financial management.
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Trade Receivables
Trade receivables are amounts customers owe for goods or services directly. It is related to your core company operations. These are typically your primary source of accounts receivable. After all, they are closely tied to your revenue generation.
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Non-Trade Receivables
Non-trade receivables encompass other money owed to your company. It is not directly related to your core operations. These can involve employee loans, supplier advances, tax refunds, etc.
AR Management
Accounts receivable management refers to handling the amount of a customer. It may be owed to you for the goods purchased on credit. It includes monitoring invoices, collecting payments, evaluating, etc. It also helps mitigate credit risks. Thus, it resolves customer disputes. Compelling AR management is critical to maintaining a positive cash flow. It also fosters a successful customer relationship. It involves tasks like on boarding new customers, evaluating their creditworthiness, etc. After all, AR management will help you reconcile received payments with corresponding invoices. It addresses any discrepancies and resolves any deduction requests raised by customers. This comprehensive approach ensures a smooth handling of collections throughout the customer life cycle.
Essential Steps in AR Management
Remember that offering goods and services on credit is the same as how a bank lends credit to its customers. This means that you must always be vigilant and ensure you receive your payment on time, put a proper system in place to monitor payment status and implement proactive measures to retrieve collections while protecting your net worth. Here are a few steps to consider to strengthen your AR management.
1. Implement credit rules
Evaluate all implied and possible credit risks before granting one. Put every customer under the same credit granting process and make an accurate evaluation of their creditworthiness. When granting credit, make sure the terms and conditions are favourable for the customers and the company and help speed up collections.
Consider using automated Credit Management software that integrates with credit rating agencies to extract credit data and monitor real-time risk. You also get automated credit review and decision features that help set credit limits quickly and give credit suggestions based on payment behavior, credit score, etc.
2. Create documents for terms and conditions.
Make sure you clearly state all the payment terms and conditions. If you are charging interest or late payment penalties, your document must mention this and should only change unless necessary. Also, ensure your customer has carefully reviewed the policies, understands them, and signs the contract after adjustments. Maintain all documents and customer interactions, including emails, texts, phone calls, etc.
Integrating an in-app dialer into your AR management system is the best way. Automated solutions like these will help your team transcribe all customer interactions, make notes for promise-to-pay, payment reminders, dispute calls, etc., and document them.
3. Clear collection plans
Prepare a plan for handling delinquent accounts. Determine the reasons for late payments. You can use automated collections cloud solutions that will help integrate with customers’ invoice portals, monitor customers’ behavior and payment patterns, and give you meaningful insights. Leverage them to strategize your collections and ensure timely payments.
4. Build invoice templates at regular intervals.
You must send invoices immediately right after delivering goods or services. Make sure all information is available and up-to-date. Mention the terms and conditions of payments and the date of invoice maturity. One of the best practices here is to embed the payment link in the reminder email so customers can click on it and pay on the go.
AR Management Example: Optimizing Credit Terms
Imagine you run a small manufacturing company and recently secured a contract with a new client. The contract is worth $50,000, and you offer them net 60-day payment terms. However, you have the option to provide net 30-day terms instead.
Scenario 1 – Net 60 Days:
- Contract Value: $50,000
- Payment Terms: Net 60 days
- Average Collection Period (ACP): 60 days
Scenario 2 – Net 30 Days:
- Contract Value: $50,000
- Payment Terms: Net 30 days
- Average Collection Period (ACP): 30 days
Now, let’s calculate the difference in your Average Collection Period (ACP) for both scenarios:
- Scenario 1 ACP: 60 days
- Scenario 2 ACP: 30 days
By offering net 30-day terms, you can potentially reduce your Average Collection Period, ensuring you receive payments faster and improving your cash flow.
AR Management: Benefits
Account receivable management is not just a process; it's a critical component of smooth company operations. Ensuring no money is stuck on customer invoices accelerates cash inflows in the company and provides a continuous flow of payments.
A company faces a lot of cash flow and liquidity problems. It resulted in financial issues and working capital shortages. It may happen when a customer delays paying invoices. Effective receivable management will help fast-track collections. It also enables efficient tracking of invoices, leveraging insights on customer behavior patterns. Thus, it prevents collections from ageing. It will also help to convert revenues into actual cash.
However, the benefits go beyond materializing sales. It also improves cash flows. After all, it improves your company's reputation. It also attracts investors as it examines how well it handles payments.
There are some other advantages too. It involves:
- An efficient accounting team that’s always more focused on framing strategies than merely performing collection duties.
- Keeping account balances up to date, making account reconciliations a seamless process.
- Rectifying errors in invoices and improving dispute management practices.
Accounts Receivable Management Challenges
Accounts receivable management challenges usually include misalignment between sales and AR teams, manual processes, data fragmentation, disruptions in accounts receivable workflow, and the absence of empirical data. US companies need structured accounts receivable management to combat them.
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Impeded collaboration due to data fragmentation
The absence of a unified data system and information silos creates obstacles to effective collaboration. With real-time access to centralized data, customer-facing teams such as sales, collections, and others can collaborate efficiently. This fragmentation of data hinders their ability to work seamlessly towards common objectives.
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Absence of empirical data for predicting adverse outcomes
A mechanism for utilizing empirical data is necessary to ensure the ability to forecast potential adverse consequences. Failure to document historical data makes it exceedingly difficult to anticipate when a customer's financial situation may undergo a detrimental shift, potentially resulting in substantial losses if they cannot fulfill their future payment obligations.
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Disruptions in AR workflows
Efficient management of credit transactions requires consistent documentation, particularly regarding invoicing and payment flows. Inadequate streamlining of the accounts receivable processes can lead to disruptions and gaps within the AR workflow, hindering the smooth continuity of operations.
Closing Remarks
Accounts receivable management is crucial for small companies. This is because it directly impacts cash flow. It also enables profitability, customer relationships, etc. After all, it allows overall financial health. Small companies can improve their cash flow, maximize profitability, etc. It also enhances customer relationships and identifies potential issues. It can be done by implementing influential accounts receivable management practices. After all, compelling accounts receivable management is essential. It ensures long-term success. Also, it enables the sustainability of small companies.
Contact Fino Partners and win with our accounts receivable management Services.
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