Optimizing your accounts receivable process is key to running a successful business. Even with steady sales, poor accounts receivable management can negatively impact your growth by making it difficult to pay vendors, loan payments, and employees on time.
A recent Quickbooks report shows that nearly 33% of businesses find themselves in this difficult position due to inefficient account receivable processes. Over 25% of entrepreneurs also have to turn down new opportunities because of poor cash flow.
A streamlined AR process makes managing sales, marketing, overall operations, and customer service easier. It also indicates the overall financial health of your business. However, this process can be difficult depending on the size of your operations.
Most business owners find it challenging to manage the high volume of invoices, purchases, orders, payment records, and AR processes such as invoice reconciliation. This is especially true for smaller businesses that do not have an accounting department.
Optimizing Your Accounts Receivable Process
So what are accounts receivable process improvement ideas? Follow the steps outlined below to optimize your accounts receivable process:
Before collection, you must ensure that the customers receive an invoice and have an easy way to pay. You can leverage automation to streamline invoicing and payment by offering electronic billing options.
Automating your invoicing also makes it easier to send invoices sooner and track them. It also ensures customers receive invoices on time and are not surprised by your collection efforts.
You can also take advantage of automation systems by creating A/R aging reports that track invoices and measure payment status. These reports allow you to view the accounts due, making it easier to address potential overdue bills in advance.
Another helpful automation tool is the Accounts Receivable Turnover ratio. This helps you calculate the number of times per year you collect AR. It evaluates your ability to issue credit and collect outstanding funds promptly.
ART = Net Annual Credit Sales ÷ ((Ending Accounts Receivable+ Beginning Accounts Receivable +) / 2)
The higher this ratio, the more efficient your AR collection process.
Optimize Your Billing Process
An effective billing and invoicing process must be accurate and streamlined. Any errors in pricing or units of measure can have damaging results.
For instance, your business could suffer significant losses, and customers could view the business as dishonest, damaging its reputation.
Address all errors quickly and promptly. In addition, always ensure that invoices are created and sent on time. They should also be produced consistently. Consider using automated billing and invoicing processes to increase accuracy.
Recently, customers can also be involved in the invoicing process through customer portals which give them autonomy. Consider using exception reports to highlight problematic accounts.
Improve the Customer Experience
While automation makes your accounts receivable process easier, the opposite is true for your customers. Over-automation can turn away your customers because it is less personalized. Avoid using multiple automated payment reminders.
Instead, consider using receivable management tools that help you save time internally, allowing you more time to provide quality customer service. Most customers appreciate a one-on-one experience that allows them to have their needs addressed more promptly.
Personalizing your customer experience also allows you to determine what caused the non-payment of certain invoices and keep your customer relationships intact. Automation can be a rigid process, but personalized services allow you to:
- Offer payment plans or discounts if non-payment occurs due to cash flow problems.
- Offer alternative payment methods if the customer is facing technical problems.
- Quickly correct errors if non-payment occurred as a result of the invoice being set to the wrong address or missing information.
- Address any problems with the services or products if non-payment occurs due to substandard products.
Optimize Collection Processes
Prioritize collection based on balances. Segment your AR metrics from the easiest to the most difficult to collect. Some metrics you can use include:
- Aging Reports: Use client balances to highlight delinquent accounts and prioritize collection efforts on them. Balances long overdue are harder to collect and may require the use of collection agencies. Aging reports can also help you prioritize collection efforts with the least troublesome customers.
- Average Payment Delay: The longer a customer takes to pay overdue invoices, the higher their average payment delay. Identifying such customers early can help you reduce late payments by personalizing the client’s experience. For instance, you can employ upfront billing, reminders, payment plans, and other proactive collection plans.
Always ensure that any recovered payments are applied to the correct customers and invoices to boost cash flow. Payments should be applied immediately to avoid issues arising from cleared invoices being marked as overdue.
Post entries promptly and avoid offering customers too many payment options. You can also use suspense accounts to hold payments until you can apply them to the correct invoices.
Establish a Clear Credit Approval Process
Too often, small businesses make detrimental credit habits to boost sales. While extending credit is important in establishing business relations, there must be a clear process before approval.
Ensure your credit approval process includes clear guidelines on how and when to evaluate or override credit limits, the application process, and placing accounts on hold. Review this process regularly as business circumstances shift.
Review Your Accounts Receivable Processes
Optimizing your accounts receivable processes makes business processes more efficient and error-proof while helping your team achieve more. Automating some of the processes will also help you:
- Save time: Automating repetitive processes allows you to focus on more productive work.
- Save money: Standardized AR processes help you establish error-proof operations, stay ahead of any potential overdue balances, and streamline your collection processes.
- Gain flexibility: You can use automated AR processes to respond to customers in real time for improved efficiency.
In addition to automation, you can also review your AR process to ensure that policies regarding late payment are enforced. To build better client relationships, consider offering discounts and payment plans for unpaid balances.
Another way to make the AR process more efficient is to reach out to your bank about cash management services.
For instance, electronic payments can instantly boost your cash flow. Whichever method you choose, the end goal is to make it easier for customers to make payments more promptly.
We recommend implementing each of the above solutions step-by-step by tackling one area at a time. If you are unsure about any of the accounts receivable processes, contact a professional accountant for help.