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5 Tips to Improve Your Accounts Receivable Process

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Did you know that you can have robust sales, a winning business model, stellar employees and still have cash flow issues that could significantly hamper the growth of your business–even your sustainability? When you know how to improve your accounts receivable process, your cash flow follows suit. And a healthy cash flow is one of the major signs that a business is poised for long-term success.

According to the experts, almost one-third of businesses are unable to pay their suppliers, meet payroll or make their loan payments. Most of the time insufficient cash flow is the reason. Cash flow is king.

So the businesses that rule are the ones that effectively manage their AR with a standardized process for collections. They also have strategies and accounts receivable tips for identifying potential issues with cash flow and addressing them well before the expected shortfalls put the business in a precarious position.

In this blog, we’ll provide five tips for accounts receivable to help you determine how to improve your accounts receivable process. They’re not groundbreaking, but a surprising number of businesses don’t follow them. And although the ideas are not all that difficult to implement, we’ll introduce a bonus sixth tip for improving your AR process. It’s an easy way to incorporate all the previous tips in one strategic move.

1. Track Two Metrics: Aging Report and ART Ratio

Take control of your collections by first determining the current payment status of all your accounts receivable. You do this by creating an aging report that tracks and measures the status of all your customers’ payments. To be most useful, this accounts receivable aging report should be updated and reviewed weekly.

Start by breaking out accounts by the number of days that have passed since the issuance of an invoice–30, 60, 90 and more than 90. You should also include the amounts due.

Take things a step farther by calculating your accounts receivable turnover (ART) ratio. This ratio shows how effective you are at collecting receivables. To arrive at this metric, you divide your net credit sales by your average accounts receivable. Generally, a higher ratio indicates that your company is collecting receivables efficiently. A lower ratio is a warning that you may need to take a more thorough look at your collections process.

Used in conjunction with other information, the ART ratio can help you when it comes to making decisions about issuing credit to your customers.

2. Be Clear and Proactive with Invoices

Presenting all the payment details–due dates, amounts owed, payment terms and methods, late fees–on each invoice in a clear manner is a must. Many of these points will have been discussed during preliminary conversations with a new customer, but you still need to make sure this all-important information is in front of the customer with every invoice.

In addition to including all the relevant details, knowing how to improve your accounts receivable process means you also need to ensure that each invoice is accurate and delivered at regular, predictable intervals. If you send invoices that are inaccurate or late, you risk looking unprofessional and set the stage for late payments.

Also, don’t wait too long after services or products are supplied to send your invoices. Ideally, you should create and send an invoice immediately so it gets into your customer’s hands sooner, which can help lower your DSO. Keep in mind it’s also good customer service to send invoices before outstanding amounts get too large. Customers usually prefer to pay smaller bills more often than to make one huge quarterly payment.

3. Follow Up and Follow Through on Accounts

It’s well known in AR circles that the longer a receivable goes uncollected, the less likely it will ever be paid. That’s why it’s important to follow up as soon as you’re aware of any past due payments. 

No one likes to make collection calls, but best practices dictate that someone from your company contacts your customer within a few days after a due date. (Some say it should be the first day after, but that’s a policy you should decide for yourself.) 

Whatever your follow-up policy is, one important tip for accounts receivable is that your process is adhered to consistently. Of course, the best way to avoid having to make uncomfortable calls is to improve your accounts receivable process.

Just as it’s important to follow up, it’s equally important to follow through by reconciling your accounts quickly. As soon as payment is received, it should be reconciled and removed from your receivables list. This keeps your AR up-to-date and makes it easier for you to calculate your ART ratio.

4. Be Good to Your Customers

You might not have thought about the role your accounts receivable plays in building strong customer relationships. Your AR policies and the way your team members interact with customers influence how your customers feel about you as a company. Typically, happier customers try to pay on time. 

Besides being courteous and responsive, there are a few ways to show customers you care. First, make it easy for them to make payments by accepting multiple payment methods. Providing a self-serve payment portal is another benefit your customers will appreciate. They can make payments with their preferred method whenever it’s convenient for them.

Another tip for accounts receivable and a simultaneous way to build customer relationships and drive collections is to offer an early payment discount. While it’s true that a discount comes at a cost to you, the fact that you’ve saved time on collections and increased cash flow could offset the cost of the discount.

Payment plans might be something to consider as well. Being flexible when your customers experience cash flow challenges could make the difference between collecting the payment or losing it altogether. Just make sure the terms are in writing and that both you and your customer sign it.

5. Diversify Your Customer Base

Doing business with large customers can be profitable, but keep in mind that sometimes those customers tend to extend their payment terms up to 90 or 120 days. When it comes to how to improve accounts receivable, this can present a hurdle to the small business that needs cash coming in faster than that.

Diversification can be the remedy. Keep your big clients, but focus on expanding your customer base to include smaller businesses who will agree to  30- or 45-day payment terms that will improve your cash flow while you’re waiting on the payments with longer windows.

The combination of large and small customers with different payment terms is a strategy to help you maintain a healthy cash flow.

Bonus Tip: Automate to Improve Accounts Receivable

As you can see, the above tips for accounts receivable really aren’t difficult. It’s possible to implement them all. But if your AR team is small, it may take a while to add in the new practices quickly, especially if they rely on manual processes for invoicing, reconciling and generating reports.

A much faster, more effective way to improve your accounts receivable is to turn to a cloud-based cash management software solution that also leverages machine learning and artificial intelligence.

Let’s see how AR automation software takes care of each of the five tips for how to improve the accounts receivable process.

  1. Aging reports and ART ratio–These and other financial reports you need, such as cash forecasting, can be created in seconds with just a few clicks. You’ll quickly have the insights you need for making business decisions at a moment’s notice. The data will be reliable, accurate and in real-time.

  2. Clear, accurate and timely invoices–As soon as sales data is entered into your ERP or other accounting system, an invoice is created and on its way to the customer. They receive accurate invoices sooner which helps to close the gap between sales and payment.

  3. Reliable follow-up and reconciliations–You can set up automatic reminders at whatever interval is most helpful with a cash management tool like Payference. You’ll know that an overdue payment won’t be overlooked or fall through the cracks. And when the payment does come in, it will immediately be reconciled with your bank and other accounts, keeping your receivables up to date.

  4. Customer service that works–Customers will appreciate all the conveniences you can provide by using automation software–a self-serve portal, multiple payment options and accurate invoices that make approvals and payments easy. All these features simplify the payment process for your customer–and you. 

  5. Attract new customers–In today’s market, customers want to do business with companies that show they’re part of the digital age. 

Want to learn more about improving accounts receivable? Check out this case study about a company that streamlined their collection process, or reach out to the team at Payference. We’re always happy to answer any questions you have!