13 Ways to Manage Your Accounts Receivable More Efficiently

Things may still happen despite your business’s best attempts to scrutinize clients and issue credit solely to those you believe to be the most dependable. Not everyone will be prompt with their payments, and you may have to take action to recover overdue amounts.

Managing the debts owed to your business is crucial for various reasons. If your company does not efficiently manage its collections, it might not have sufficient cash on hand to keep operating. Adverse customer and investor relations effects might also result from late payment collection.

We’ve compiled a list of the best measures you can take to manage your accounts receivable more efficiently.

Accounts Receivable Management Best Practices

Good accounts receivable management aims to streamline your billing, payment, and collection processes so that you get paid quickly and reduce the likelihood of bad debt.

Follow these guidelines to help you manage your collections more efficiently.

1. Embrace Automated Invoicing and Payment

Get rid of paper checks and invoices because they’re tedious to keep tabs on and simple to misplace. Consider an automated invoicing solution that facilitates simple online payments from customers.

By automating your invoicing and payments, you’ll have less to remember and less space for random errors. Use invoicing software with built-in payment processing to allow customers to pay with a single click directly from their invoice.

Furthermore, you can configure preferences for individualized, automated follow-up if payments are overdue. Your company can keep up with collections while maintaining customer-specific interactions without wasting time.

2. Define Specific Billing Processes

You will need to have a uniform and straightforward payment process. Publish the process to ensure that everybody in your organization adheres to the same standards. Your payment procedure should comprise the following:

• Payment cycles and payment dates
• Details to include on every invoice
• Recordkeeping procedures
• Routine monitoring of the accounts receivable process
• Process for collecting delayed payments

Include in your records not just the daily, weekly, and monthly procedures necessary for accurate customer billing but also:

• Client-specific payment history and notes
• Different systems or information for every individual customer’s billing, if applicable
• Clients’ contact details

3. Assess Credit and Financial History

Ensure you do thorough homework on a client’s finances and credit rating before giving them credit. Get references from other businesses they’ve worked with in the past.

A client with a big list of outstanding credit is a warning sign that their finances are in trouble. It would help if you didn’t get into long-term agreements with them until they have sorted out their financial issues.

If a client tends to pay late, you might want to offer them reasonable terms that are good for your business.

4. Act Proactively

Establish a procedure that allows your company to act on late payments promptly. Late communication not only harms your company but also affects the client. Make contact with consumers as quickly as possible if they fall behind on payments so that you may assist them in getting back on track.

Furthermore, ensuring both parties are on the same page by discussing payment schedules and penalties from the outset of the relationship rather than after a customer has fallen behind on payments will help immensely.

5. Define Credit and Collection Standards and Adhere to Them

You might be interested in extending credit to specific customers. If so, lay out your credit standards to avoid offering too much credit to certain customers. That will also render it easy for any member of your organization to evaluate whether to give credit when a customer asks for it.

Likewise, having well-defined payments collection standards ensures you may adopt a proactive approach to dealing with delinquent accounts and streamlines your process. Your collection standards should outline regular accounts receivable reviews and actions to engage customers in case of late payments.

6. Make It Easy for Clients

Customers having problems receiving, viewing, or comprehending your bills or not having access to a simple and fast payment method will create the vast majority of billing problems you will face. Get rid of such problems by implementing a client-friendly system that will generate a great customer experience.

To prevent having your invoices flagged as spam by email filters, consider switching to an electronic invoicing solution that sends invoice details and links in line with the email.

Make it simple for customers to pay you immediately after receiving an invoice by setting up online payment portals that accept various payment methods. These measures will improve client relations and decrease the likelihood of late or unpaid invoices.

7. Set Up Automations

Automating account conversations with customers and minimizing manual processes can help you save time and ensure consistency. Account receivable management software helps automate the process of sending out invoices, acknowledgments of payment, and alerts of outstanding balances via email.

Even if you still send out paper bills, automating your correspondence is a great way to save time and make things go more smoothly. Set up automated client follow-ups based on specific information in your database using integration tools. For instance, you can configure an email template to be sent to a customer after you add a payment receipt to a spreadsheet.

8. Get All Teams Involved in the Process

Your accounts receivable procedure must not be your accounts receivable staff’s business only. Integrating teams such as the sales and other client-facing teams in the accounts receivable management process ensure that everybody is on the same page.

It will also help you improve efficiency, prevent duplication, and eliminate errors that could waste time or hurt your company’s bottom line.

9. Employ the Relevant KPIs

To ensure that your accounts receivable procedures are running effectively, monitor these AR performance metrics:

• Days Sales Outstanding (DSO): DSO measures the typical time lag between sending an invoice and receiving payment. The target DSO should be less than 30 days. Aim to maintain a DSO of less than 30 days.
• Average Days Delinquent (ADD): The number of days payments from customers are typically late is expressed as ADD. It’s yet another figure that should be kept as low as possible. If it increases, verify that billing is running smoothly and that the accounts receivable department has sufficient staff to support collections.
• Turnover ratio: The figure reveals how quickly you collect customer payments and shows your cash flow. Make sure it doesn’t get too high. If your ratio is high, it indicates that you have many open accounts with uncollected payments. Thus, you may want to reconsider your billing and collections procedures.
• Collection Effectiveness Index (CEI): The figure indicates how successfully you convert accounts receivable into cash. You want this number to be as near 100 as possible, suggesting that you have received payments from every customer transacting with your business.
• Revised invoices: You need to keep the number of revised invoices low. Suppose you notice an increase in the number of changed invoices over a specific period. In that case, you should review your billing standards. The personnel in your business needs to maintain efficiency and prevent payment-delaying errors.

10. Adopt Real-time Communications

It is no secret that client interactions during collection calls can be heated. The use of technology can help you to reduce these issues by enhancing communication and eliminating delays. 

Specific platforms enable your staff to communicate terms and conditions or papers for signing through text message during a call to reduce delays and maximize client interaction.

Do not delay taking action when payments become overdue; act immediately and efficiently. The more time passes, the more likely the debt will not be paid. As soon as debt becomes due, you should send out reminders.

11. Make Credit Management a Priority

Don’t give credit irresponsibly for maintaining sales volume. The approach backfires in the long run and is only one of the numerous potential issues without credit management procedures. Prioritizing credit management helps your business to cope with the recent legislation. In addition, you have an easy time maintaining relationships with suppliers and vendors.

12. Establish a Billing Dispute Resolution Procedure

Lay forth clear regulations for resolving billing disagreements. Since your employees will have a solution in case of a dispute, client satisfaction levels are bound to grow. An effective dispute resolution procedure will help you solve any discrepancies common due to inaccuracies.

13. Consider Outsourcing

Routine tracking and assessing are essential for effective accounts receivable management. You may not have the workforce or time to handle all that needs attention at once.

Working with trusted accounts receivable outsourcing firms will give you peace of mind knowing that someone qualified is monitoring your financial dealings.

Final Thoughts

Managing accounts receivable entails establishing and adhering to internal norms and procedures that streamline the company’s invoicing and payment processes for its customers. Doing so increases the likelihood of timely payment and decreases the chances of late payments.

The process of optimization will yield substantial benefits over time. We hope the article will help you to adopt the correct accounts receivable management measures.