Get Tips for Improving the Accounts Receivable Processes

Posted on 3rd May 2019

Why Optimizing Accounts Receivable Matters

Article By: DENNIS NAJJAR

Like many business owners, you may not immediately see the benefits of proactively optimizing your accounts receivable processes. As mentioned above, however, doing so can drastically improve many aspects of your business. It prevents existing capital from going to waste, which increases liquidity. In turn, a business is better able to reduce debt, reduce costs, fund growth and, in many cases, outperform the competition.

A crucial part of optimizing accounts receivable processes is to be persistent about starting the process early. All too often, businesses are so intent on making sales that they treat accounts receivable as an afterthought. Starting the process early means discussing things like payment terms in the early stages of the customer relationship. Getting a new customer on board with electronic payments early in the process is another example of taking a proactive approach to the situation. Before doing anything else, then, commit your company to making accounts receivable a priority as early in the process as possible.

Typical Accounts Receivable Pitfalls

Business owners often push accounts receivable onto the back burner, assuming that leaving well enough alone is perfectly fine. However, poor AR practices cause a number of issues for businesses. From extending credit to unqualified customers to failing to follow up with past-due accounts in a timely manner, poor AR practices suck time, money and productivity from a business. They often produce a ripple effect that touches virtually every aspect of running a company. The worst part of all is that many of the problems are easily avoidable.

Other common AR-related issues include improperly applying and allocating cash payments, failing to pay attention to the accuracy of invoices and bills and failure to generate and properly use reports to zero in on potential issues. Any one of these and other missteps can cause far-reaching issues for even very successful and profitable businesses, so it is more than worth it to take steps to correct them at the earliest possible time.

Optimize These Five Activities for Improved Accounts Receivable Processing

Optimizing accounts receivable processes seems pretty daunting from the outset. However, by taking a methodical approach to the situation, you can implement changes that will result in fairly rapid and dramatic improvements. For your convenience, we've identified five activities that, when properly optimized, will drastically improve the overall functioning of your accounts receivable process and, in turn, produce many exciting benefits for your business as a whole:

  1. Maintain Accurate Customer Data - Centralizing the master data process to ensure the accuracy of customer accounts and the information is a crucial part of establishing and maintaining an effective accounts receivable process. For example, inaccurate addresses can cause invoices to be mailed to the wrong place, which results in late payments. Customer accounts should be audited on a consistent basis to check for anomalies like unusual or inappropriate payment terms, credit limits, discounts and the like. Changes to customer data should be properly documented, and controls should be put in place to prevent unauthorized people from being able to access or edit data.
  1. Establish a Clear, Concise Credit Approval Process - All too often, businesses slip into detrimental credit habits in order to boost sales. Of course, this leads to a vicious cycle that can ultimately be disastrous for a company. Extending credit can be a very good thing, but a clear process for doing so must be established. It should include clear instructions regarding when and how to evaluate and override credit limits, when to place accounts on hold and how the application process works. Regular reviews of the credit approval process should be performed because circumstances change.
  1. Establish an Effective Billing Process - The billing and invoicing of customers must be accurate and streamlined to be effective. Errors in pricing, units of measure and the like can wreak serious havoc. Further, invoices must be created and sent in a timely manner, and the manner in which they are produced should be consistent and defined. One way to improve billing and invoicing is by automating as much of it as possible, so don't be afraid to rely on technology here. Use exception reports to pinpoint problematic accounts. If possible, set up a customer portal to shift some of the work to customers while giving them a sense of autonomy.
  1. Hone the Cash Application Process - Upon arriving, payments must be applied correctly. They should be applied to the correct customer and to the appropriate invoices. Otherwise, if disputes or issues arise later, trying to zero in on the initial problem will be very difficult. Payments should also be applied quickly to ensure that at any given moment, you know which accounts are current and which are past due. One potential way to optimize the process is by offering a limited number of payment options for simplicity. Post journal entries promptly and long before cutoff dates. Whenever possible, avoiding dumping cash into suspense accounts until you have the time to figure out where it's actually supposed to go.
  1. Optimize the Collection Process - Properly optimizing accounts receivable makes it much easier to collect payment in a timely and effective manner. When payments are properly applied, for instance, it's easy to determine which accounts are at risk of going into default. Collection efforts should be consistent and methodical. A clearly defined process for negotiating payment plans should be established to ensure that it dovetails with the company's overall objectives. Processes should be automated as much as possible to reduce the risk of errors from manual entry.

Eight Best Practices to Adopt to Improve Accounts Receivable Processes

The American Productivity and Quality Center, or APQC, established a set of standards called Open Standards. They outline best practices for accounts receivable processing, and they should prove to be invaluable as you work toward honing your AR processes. We've summarized the eight most important points from the APQC Open Standards for your convenience:

  1. Eliminate Obstacles to Receiving Payments - For example, survey your customers to find out which payment methods work best for them. From there, consider offering a different selection of payment options to make it easier for customers to pay their invoices on time.
  2. Prioritize Credit Management - Don't extend credit willy-nilly just to keep sales plugging along. This strategy backfires over the long haul and is just one example of the many potential problems that can arise due to poor credit management processes.
  1. Assess Accounts Receivable Regularly - Establish a specific schedule for monitoring and assessing the state of your accounts receivable. Ideally, it should be done at least once a week. The sooner you find errors, the sooner you can correct them—and the less likely they are to cause major problems for your business.
  2. Consider Shortening Payment Terms - There's no law that says all customers must have net-30 payment terms. Oftentimes, using shorter payment terms prompts slow-paying customers to pay at least a little more quickly, so it's a worthwhile option to consider.
  1. Create a Billing Dispute Resolution Process - Establish a specific process for handling billing disputes. This will not only streamline the process, but it will improve overall customer satisfaction because your team will know precisely what to do when a dispute arises.
  2. Automate - Investigate different types of software and other forms of technology for automating as many accounts receivables processes as possible. The more than you can remove the human element, the more accurate and reliable the entire process will be. Many programs are expensive, but the ROI is considerable as there are fewer errors and, in many cases, employee productivity gets a boost too.
  1. Establish a Proactive Collections Process - Make collections a top priority and enforce it by establishing a clear, concise collections strategy. Ideally, aim to intervene early. When an account slips into the past-due column, your team should be all over it and know just what to do.
  2. Bill Electronically - If you have the means to do so, start billing customers electronically. While there will be some who can't support electronic invoices and payments, most companies are on board with this these days. The fewer paper checks that you have to process and mail you have to send, the easier and more accurate the entire process will be.