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How does Accounts Receivable Management Strategy help Optimize the Working Capital?

Last updated: 19 Nov, 2021 By | 6 Minutes Read

Irrespective of the business type, it is imperative to have an efficient accounts receivable strategy in place for healthy cash flow. No business can execute its operations until it has adequate working capital, and this is only possible when the accounts receivable process is streamlined.

However, many business owners neglect its importance completely and put in minimal efforts to collect payments from various sources. One of the biggest mistakes committed by almost 80% of the owners is in the form of a manual approach towards the accounts receivable process, resulting in dissatisfied customers and delayed payments, along with the minimum use of the working capital.

What Makes Optimizing Accounts Receivable (AR) Essential?

The benefits associated with optimizing the accounts receivable process may take some time to come to the front, but a lot of other aspects gain immediately. This can be seen in the form of increased liquidity by preventing existing capital from getting wasted. Apart from this, the business is able to perform better, reduce debt and costs, aid growth, and do a lot more.

When it comes to optimizing accounts receivable processes, it is imperative to start as early as you can and give due importance to it as you give to the sales. This includes communicating the payment terms with the customer during the initial stage itself. A proactive approach towards this can be taken by setting an electronic payment method for new customers coming in.

Common Accounts Receivable Challenges

Poor accounts receivable practices create multiple issues for businesses, which include extending credit to customers who have not cleared previous dues timely, failing to focus on the accuracy of bills and invoices, generate and make full use of the financial reports, and more. Also, spending time on dealing with faulty invoices leaves less room for the accounting and finance team to be more proactive and productive.

This leads to the tying of working capital and impacts customer satisfaction and process efficiency in a negative manner. All these challenges are combined as a result of a business’s failure to leverage digital technologies because of the following:

  • Isolated operations and processes across the back-office, front, and middle

  • Minimum collaboration between credit and sales teams

  • No one-view of workflows, AR risks, collections data

  • Maximum bad-debt write-offs

  • Dissimilar record systems like ERPs, billing systems, and tools for customer relationship management

  • Incorrect billing from manual, decentralized, and non-standard processes

  • Maximum no. of small-balance transactions that are unresolved

5 Practices to Enhance the Efficiency of AR Process

Optimizing your accounts receivable process may seem like a daunting task at first, but it can be done easily with the help of the following 5 strategies, along with improving the overall functioning of your business:

1. Maintain Customer Data Precisely

In order to establish and maintain an efficient accounts receivable process, it is essential to centralize the main data process to make sure that the customer information and accounts are accurate. For instance, when the addresses are not correct, it results in the delivering of the invoices to a wrong address, making the collection of payments late eventually.

It is imperative to audit the accounts of the customers on a consistent basis to look for irregularities like inappropriate or unusual terms of payments, discounts, credit limits, and more. Any changes made to customer data should be documented in the best manner, and effective controls must be there to ensure no one gains unwanted access to the data for stealing or editing.

2. Have a Concise, Clear Credit Approval Process in Place

Most of the time, it is witnessed that businesses form an unfavorable credit habit for the sole purpose of boosting sales, leading to a vicious cycle that becomes destructive for a company eventually. There is no harm when it comes to extending credit, but a definite process for approval should be in place.

The process should clearly state the way application process works, situations which demand to put an account to hold, along with the instructions regarding the overriding and evaluation of credit limits. Also, in order to make sure that the credit approval process is working fine under all circumstances, consistent reviewing must be done to look for areas of improvement.

3. Set-up an Efficient Billing Process

Every company’s billing process paves the way for either a successful or unsuccessful invoice management. The invoice process needs to be streamlined to ensure accuracy as any error in measurement units and pricing can have a drastic effect on the overall productivity and profitability. Also, it is essential to create and send invoices on time, along with defining clearly the way they are produced.

For this, incorporating the use of technology to automate the invoice process is one of the best solutions. Accounts that are troublesome should be pointed out with exception reports for efficient dealing. Also, if possible, establish a customer portal to transfer some of the burdens to customers in order to give them an autonomy sense.

4. Polish the Cash Application Process

When payments arrive, they must be applied in the correct form to the appropriate invoices and the correct customer. This is essential in order to deal with a dispute which may arise in the future. Also, payments must be applied timely to categorize the current and past accounts.

By providing customers with limited payment options, the cash application process can be optimized greatly in terms of simplicity. The journal entries must be posted timely and beforehand with respect to the cut-off dates. Dumping of the cash to the suspense accounts should be avoided until you figure out exactly what you need to do with it.

5. Streamline the Collection Process

To make sure that payments are collected in an efficient and timely manner, it is essential to streamline the accounts receivable process. For instance, if payments are applied proficiently, determining the accounts which are at the risk of moving into the defaulter list can be done easily. A methodical and consistent approach needs to be adopted to aid the collection efforts.

Apart from this, establishing an effective process for negotiating plans of payment is imperative to ensure compliance with the overall objectives of the company. Also, for minimizing the manual entry errors, one must try to make maximum processes automated.

Top Accounts Receivable Process Implementations

1. Get Rid of Every Payment Receiving Obstacle

You can eliminate every obstacle in your payment receiving process and also find ways to speed up the payments, like figuring out the best payment option for your customers.

2. Monitor Accounts Receivable Consistently

At least once a week, monitor your accounts receivable process for finding out the errors, along with other areas for improvement.

3. Opt for Fewer Payment Terms

One of the best ways to make slow-paying customers pay fast is to make the payment terms as short as possible for them.

4. Have a Process for Managing Billing Disputes

When you have a resolution process in place for managing billing disputes, your team will be able to act fast during times of dispute, enhancing customer satisfaction at large.

5. Opt for Electronic Billing

Billing electronically saves you from paper checks and mailing headaches, along with making the entire process quicker and accurate.

Experts Advice on AR Management

1. John Moss, CEO of English Blinds

QuickBooks Online is the AR tech we’ve found to be the most useful out of the various options we’ve tried because it offers several advantages for our business model and working practices that simply tick all of the relevant boxes for us.

The specific features that place QuickBooks Online on top of the pile for me are quick and unobtrusive syncing overnight and no need to take any action or accept updates and accommodate new releases. This latter often results in huge lag whilst the software is in use or even the inability to use it entirely, which QuickBooks online avoids. Also, its sharing options and access control protocols are quick, slick, and highly controllable.

2. Chayim Kessler, CPA MiamiBeachCPA LLC

No financial organization can exist today without fully utilizing automation software for their credit and collections. Each step in the accounts receivable workflow is guaranteed to be completed since all invoicing processes are digitized. This means businesses will never have to miss on uploading invoices or reconciling payments with internal accounting systems. The biggest benefits to this are reducing administrative costs and minimizing operational risks.

A huge trend in the accounting profession also involves machine learning and predictive analytics in software. It helps predict cash flow with higher accuracy, streamlines the payment system, and presents more intelligent reporting.

3. Yoann Bierling founder of YBierling

Using an ERP or Enterprise Resource Planning is one of the best ways to ensure that accounts receivable are fully managed not only within the financial processes but also in connection with other corporate streams such as sales and delivery, for example.

Using different sets of Master data can lead to inconsistencies in reporting, and ultimately to money loss, missed payments, or even legal issues. This is hardly possible when using ERP software.

Additionally, the sales invoice generation, incoming payments, or partial payments management, along with other accounts receivable management practices, can be streamlined, meaning that consistent processes can be enforced in the whole structure, even spreading on different offices, plants, organizations, and countries.

4. Chane Steiner, CEO of Crediful

Most people have heard of QuickBooks, and the software is a reasonable program to use if you’re a relatively small company. If you’re under 100 users, this format is relatively inexpensive at around $5/month and is common enough that you’re not going to have a lot of problems with familiarity.

For larger companies, Xero is a solid option. Optimal for both small and mid-sized companies, Xero can handle more than 1000 users and is only $9/month. It’s user-friendly and has decent customer service. Although calling is an option, using their online tech support is a better deal. It offers the standards of ACH payment processing, payroll, collections, bills and invoicing, recurring payments, and receivables ledger. Overall, it’s a solid choice with enough satisfied customers, proving that it’s worth for a small to mid-sized business.

5. Brandon Gray, CPA | Partner at Banks, Gray and Crumpler PLLC & CEO of Firm360

As a partner at a public accounting firm, Accounts Receivable is a large part of my job, whether I like it or not. If you don’t collect the revenue from your clients, you will not stay in business for long since we all know that cash flow is the lifeblood of the business. We have used various processes and systems over the years from one extreme of hand-written time tracking and invoice templates in Microsoft Office to the other extreme of completely integrated time tracking and invoicing.

The systems that have worked the best for us are the ones that are tightly integrated into our daily processes. If my staff has to go into some other system to duplicate-enter their time for billing, sometimes it gets lost.

– Another important feature is around collections. We can have over 20% of our annual revenue in our unpaid Accounts Receivables at any given time. The systems that automatically remind us to make collections calls, or even better send notifications to past due clients automatically, are the ones that have the best impact on our ability to get paid in a timely manner.

6. Rochelle Burnside Manager at Best Company

QuickBooks is a popular choice for managing accounts receivable, and for a good reason. It’s easy to remind customers of their outstanding statements through Quickbooks and find the clients that still need to pay an invoice. Their real-time reports keep you up-to-date on your cash flow so you can stay out of the red. And the best thing about Quickbooks is that it can do so much more than manage accounts receivable — you can keep track of several aspects of your finances with them, so you aren’t darting back and forth between multiple applications.

Sage Intacct is also a great choice for managing accounts receivable. It can automate invoicing and collections, and Sage even claims they can cut AR processing time by 50%. This software can pair with a CRM like Salesforce to manage more of your information in one place.

If you’re still juggling paper copies of invoices and receipts, I recommend The Neat Company. The Neat Company can scan documents and autofill them into a digital format, saving you time on data entry. It can also integrate with Quickbooks (and tax software like H&R Block and Turbotax), giving you the opportunity for convenient digital expense management.

Conclusion

This brings us to the conclusion that the accounts receivable process of every company holds immense importance and is the only way to aid a healthy workflow and working capital. The above strategies and implementations will surely help in streamlining the AR process, along with enhancing customer satisfaction, boosting customer retention, and profitability eventually.

Are you looking for accounts receivable services to streamline your process? Join hands with Cogneesol, a top outsourcing firm with more than 13 years of experience in providing top-notch back-office solutions. Our accounting experts will take care of your AR process in an accurate, timely, and affordable manner. Get in touch today to avail your free trial!

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