Accounts receivable is the single most important line on your balance sheet. It's crucial to ensure that you have control over it as it affects many aspects, including business performance and liquidity. Optimizing your accounts receivable allows you to produce higher customer value and greater customer satisfaction and save costs in the long run. It will help increase customer retention, eventually leading to more sales in the future.
Many businesses use various accounts receivable best practices, which actually don’t drive any results for them. The accounts receivables department still faces challenges to overbear in the AR process, strategy, and payment collections.
That’s why we have come up with a list of best practices that can help businesses optimize accounts receivables. But before that, let’s discuss why we need accounts receivable and the challenges in overbearing AR.
Why Do We Need to Optimize the Accounts Receivable?
Accounts receivable optimization balances the company's bank accounts, so they do not become too large or too small. Various AR teams do this by adjusting the terms and conditions of loans by reducing interest rates.
Accounts receivable optimization helps the business reduce costs while increasing profits. The following are some key benefits of optimizing your accounts receivable:
You can get more business from existing customers.
You can attract new customers by marketing strategies targeting specific demographics or online communities where they congregate online (e.g., Facebook groups).
- You will have more time to focus on other aspects of your business, like product development and marketing initiatives that don’t rely on customer payments being made on time or at all (e.g., advertising
You will develop a good customer relationship.
When an account receivable needs to be optimized, it costs you much more than it would collect from the customer.
For example, if a customer has an outstanding balance on their account and you’re paying interest instead of collecting it, you’re losing money. And if your customers need to pay their bills and fees as they should, then they’re likely paying more in fees than on their accounts receivable.
5 Ways To Optimize Your Accounts Receivable
Accounts receivable is a key part of any company's financial life. All companies need to maintain accurate records on their ARs to provide clear insight into how much money they owe to different customers and how much they have currently collected from them.
It can be challenging to manage the accounts receivable lifecycle of an entire organization. Below are some of the challenges which were overcome using accounts receivable best practices.
Bringing money in is the biggest receivable challenge. One of the best ways to optimize accounting receivables is to optimize cash flow.
Cash flow optimization is a process that improves the amount of cash an organization has at any given point. This process optimizes accounts receivable, reducing the days it takes to collect payment from customers or optimizing inventory, which means reducing the number of days it takes to sell all inventory on hand.
However, sometimes send paper or PDF invoices and receive checks via traditional mail, even with a lockbox system, receiving can take more than a week if vendors pay on time. This is done using various techniques and processes, such as credit management, invoice automation, and late payment penalties. To optimize cash flow, AR teams must close the timing gap between being paid and their AP teams billing schedules.
It’s not about how many people you hire in the accounts receivable team to collect payments. But it’s about having an appropriate process to maintain the cash flow and have no errors. This is why adopting accounts receivables best practices is critical.
The time it takes for a business to collect outstanding invoices is called Days Sales Outstanding (DSO). It is constantly fluctuating due to issues facing customers and other complications. The biggest challenge is that 39% of invoices are paid late, and 4% are written off as bad debt annually. Companies lose 51% of their value when receivables are not paid on time.
One of the best account receivables practices is to reduce DSO. It makes it easier and faster to pay invoices to boost receivables collection and reduce DSO. Credit cards, debit cards, and ACH transfers are digital options for providing payments and are straightforward to process.
Receiving collections manually comes with human errors. Even if you have a solid billing policy and explicit instructions, professionals have hundreds of other things to do on top of complicated and dull data entry work.
Spreadsheets are highly fallible, with 94% containing errors. However, ERPs could be better, too. After all, only the tool has changed. AR professionals still input data manually, even if some customizations be saved.
Automation is one of the accounts receivable best practices to reduce error. Automation streamlined the receivable process, so AR teams only have expectations or deals. As a result, the straight-through processing rates can be as high as 67.2%.
The AR team has to decide first which payment options make the most sense to accept. Then, they must ensure that their customers will use their payment options. The customer experience should be seamless while more customers are open to electronic B2B payments.
AR departments can offer good payment options to boost receivable collections. Payment acceptance through ACH transfer, corporate credit, and debit cards can lead a long way to streamlining billing. Moreover, the AR team must be prepared to deal with credit card processing fees. They must decide whether they will absorb the convenience fee, pass it on to customers, or go for less-expensive payment options.
They can reduce costs and encourage ACH payments by making bank-to-bank transfers accessible and asking for convenience fees for credit card transactions. Thus, the correct payment solutions should allow organizations to deal with these hidden costs.
A healthy relationship means a customer pays their bill on time, which helps the business maintain cash flow and revenue. Communication with customers can lead to longer invoice payment times.
Communication is key to maintaining a healthy relationship with clients yet to process their invoices. Companies must communicate promptly and consistently to ensure clarity and timely invoice processing.
Communication through phone calls, emails, or text messages will make it easier for both parties to understand each other’s needs and expectations. There are resources available that can help you to simplify the process of managing accounts receivable. Accounts receivable management tools are specially designed software programs that optimize the collection process.
Optimizing accounts receivables need a stronger approach
Managing accounts receivable is essential for every business and organization. Many challenges exist, so the AR teams need to optimize their accounts receivables through the above-mentioned best practices. And if you want, you can hire the right bookkeeping firm to help you streamline your collections and maintain the healthy cash flow of your organization.