Accounts receivable (AR) is one of the most crucial aspects of the cash flow management stack. Steps to improve AR collection can ensure payments from customers and reduce the risk of bad debt. Without an efficient process, collecting from your customers can become unpredictable and put your business profitability at risk.
There are several challenges associated with AR collections for business owners. This article provides best practices and actionable tips to help businesses improve their accounts receivable collection. By taking these steps, businesses can optimize cash flow, better manage debts and foster stronger relationships with customers. In turn, better collections result in more cash for the company and help improve overall business operations.
What Is the Role of Collections in Accounts Receivable?
In a business environment, “collections” refers to the tracking and recovering of payments from customers. This includes tracking and collecting unpaid invoices and overdue balances. A collections department is responsible for the company receiving the funds owed by customers in a timely manner.
Accounts receivable collections directly impact a company's financial stability. Here are three key benefits to improving your collections processes:
- Stronger Cash Flow: Collections teams help businesses receive payments in a timely manner by tracking and collecting outstanding payments. An effective collections process minimizes the amount of time between invoicing a client and receiving a payment. This helps companies meet financial obligations, invest in growth and manage day-to-day operations.
- Less Bad Debt: Collections teams are responsible for ensuring that customers pay their invoices promptly. They also follow up with customers with outstanding balances until they get paid or resolved. On top of that, they can also negotiate new payment deals. These reminders and communications play a crucial role in minimizing bad debt.
- Better Customer Relationships: While collections pursue payments, it also plays a crucial part in maintaining positive customer relationships. By working collaboratively to find the best solutions, your business can improve customer loyalty and boost its reputation during every customer touchpoint.
Best Practices to Improve Your Collections
As discussed above, the goal of collections is to better manage debt and improve cash flow. It requires strong communication, negotiation, and a customer-oriented approach. This helps to maintain and improve relationships while ensuring timely payments. An efficient collections process is essential for financial stability and supporting the overall health of a business.
You can use the following steps as part of a scalable accounts receivable process. The earlier your business can put these practices in place, the less likely collecting is to result in write-offs:
1. Automate Manual AR Processes
Automating your manual and redundant accounts receivable tasks has many benefits. For one, it eliminates manual, repetitive work, such as generating invoices, posting payments, and entering data. By automating these tasks, you can free up time for your team to focus on more strategic work such as improving customer relationships.
AR automation tools also help teams by minimizing human mistakes. For example, manual data entry is prone to many errors, which can lead to billing mistakes and payment delays. Automated accounts receivable systems improve data accuracy and enhance the integrity of your financial records – all while saving time for your team and streamlining your workflow.
Automation also speeds up the processing and delivery of invoices, reducing the time it takes to receive payments. There are many AR automation solutions on the market. If your team is looking to select an AR automation partner, make sure to do your research to select the best provider.
2. Increase Visibility Into your AR Work Flow and Cash Management
Monitoring your AR and cash management systems unlocks valuable insights. For starters, a better view can help you manage your cash flows. By having a better look at outstanding invoices and payments, your team can proactively manage cash inflows and outflows and make better budgeting decisions.
This increased visibility also helps expedite decision-making. Real-time data and insights on your accounts receivable workflow will empower you to make timely and informed decisions about credit terms, collection strategies, and customer relationships. It also helps identify and resolve bottlenecks as well as mitigate other risks.
Looking for more visibility into your AR workflow? A dedicated accounts receivable automation system can provide real-time tracking of invoices, payments, and outstanding balances. Check out our guide on the top AR automation tools for more information.
3. Get a Firm Handle on the Impacts of Delayed Payments
Understanding the true effects of delayed customer payments requires a strategic approach. Here are some actionable steps you can take for your team:
- Review and Improve Invoicing: Ensure your invoices are both accurate and clear. Then you can use standardized invoicing and establish clear payment terms and due dates.
- Communicate Payment Expectations: Communicate your payment expectations to customers. Include payment options, terms and due dates on your invoices, and follow up with repeated payment reminders.
- Implement a Collections Strategy: Develop a structured collections strategy to follow up on overdue payments. Setting timelines for sending reminders and other collection efforts can go a long way.
- Consider Incentives and Penalties: Reward prompt payments by offering discounts or rewards. Conversely, you can use late payment penalties to discourage delays.
4. Embrace Electronic Invoices
Digital invoices increase the speed and visibility of your AR process, allowing for instant delivery to your customers via email or online portals. This can cut out postal delays and help customers receive their invoices more quickly.
A manual invoicing process can also be prone to errors, such as incorrect calculations or missing information whereas electronic invoicing minimizes these errors.
5. Monitor Your Aging
Monitoring the aging of your accounts receivable is crucial for collections management. Here are some tips to help you monitor:
- Establish Aging Categories: Create aging categories based on the number of days outstanding, such as 0-30 days, 31-60 days, 61-90 days, and over 90 days. Categorizing receivables can help you identify collection issues.
- Use Aging Reports: Create aging reports regularly to track and analyze the status of your accounts receivable. These reports provide a snapshot of outstanding invoices, broken down by categories.
- Set Clear Collection Goals: Define collection goals based on aging categories and set targets for reducing balances in each category. This allows you to track progress and measure performance.
6. Communicate with Customers and Make it Easy for Them to Pay
Most customers will pay in a timely manner if you make it simple and easy for them to do so. Start by making your invoices clear and well-organized. Make sure to provide a breakdown of charges, along with a payment due date and accepted payment methods.
The speed at which you send out the invoice can make a difference as well. Send out invoices promptly after delivering goods or services. The sooner you invoice, the sooner your customers can start processing the invoice for payment. Avoid invoicing delays to keep a consistent payment cycle.
7. Communicate Internally
The collection process will never improve if you and your team don’t learn how to communicate efficiently. Build clear communication channels within your organization so everyone involved in the collections process can easily communicate.
Defining the roles and responsibilities of individuals involved in the collections process is also key. Assign specific tasks and establish accountability so everyone understands their roles in the process.
Conclusion
Accounts receivable is one lever that can help you gain control over your cash flows. Taking an active stance on managing AR requires strong communication and teamwork. With the right plan and action, you can improve your cash flow to maintain and grow the business.
By using these best practices, your business can optimize its accounts receivable collection process. You can reduce late payments, improve cash flow, and maintain strong financial health.
For most businesses, an all-in-one solution for AR collections makes sense. It can deliver a more seamless cash management process. It helps to have all of your cash flow features like AR, AP, cash flow forecasting, and credit features in one place. It’s cost-effective and easy for finance managers and CFOs at most small to medium-sized businesses.
Centime's automated accounts receivable solution helps small to medium-sized businesses streamline their AR collection process without taking away from the big picture. Talk to us to learn more about our integrated solution.
