Simply mentioning Accounts Receivable makes people groan and get irritated. It's an unpleasant, but necessary part of business. Some processes are overly complex, and others are missing key components. Both are problematic and need improvements.
A big way companies get into A/R trouble is by extending lines of credit to customers. Usually, the strategy is to boost immediate sales. People and businesses like using credit especially if they want or need something they can't pay for in full, now. The downside for a company providing credit is increased risk. The Accounts Receivable side of the Balance Sheet grows, the risk grows and the need for an effective A/R collections process.
The A/R process is usually over looked until it starts creating cash flow problems. To start, companies usually go with solutions that are most readily available or most commonly used. Most A/R tools haven't changed in 30+ years. In order to get something that fits a business today, the most travelled path is rarely the best option. The longer companies wait to fix existing problems or implement updated solutions, the more expensive will it get. Revenue will slip away and cash will be burned on expensive, old processes.
A great way to keep in mind how the accounts receivable work is by understanding the following formula:
High Customer Satisfaction + Accurate & Clear Invoice + Effective Collection = Incredible A/R Results
Here is an overview of A/R best practices, plus tips for easy fixes that can be implemented quickly without extra costs. Before you continue reading and if you are new to accounts receivable we recommend you to read this blog about A/R fundamentals
Many companies make the mistake of viewing A/R as purely process driven. The business function is to collect payments from all accounts. Past due payment collections to avoid aging accounts and write-offs is often impersonal. The company is tasked with getting the money and the customer feels it. One of the primary variables in the former A/R equation is the customer satisfaction.
More people will make payments if the experience is enjoyable. I know, is paying a bill ever enjoyable? Maybe a better way of phrasing it is making the A/R experience as painless and fast as possible for customers.
Sometimes, A/R problems are caused by customer unhappiness with products or services provided. Or, they can have a billing or service dispute. Accounts will age without you knowing the reason because outdated accounts receivable softwares are being used. If a customer doesn't answer their phone and that's the foundation of your A/R, how are you to discover why they're not paying? Customer engagement increases when the right tools and communication are being used. By having effective communication, you're able to learn why customers aren't paying and resolve problems.
There are many opportunities to improve customer satisfaction throughout the accounts receivable process. These are a couple examples. Happy customers pay bills faster than unhappy ones. They're also more likely to resolve delinquent bills instead of ignoring you.
Do you know your company's Key Performance Indicators (KPI)? If yes, then you are aware of how A/R effectiveness impacts cash flow and financial statements, positively or negatively.
In finance, Accounts Receivable is positive on balance sheets, but turns negative if it goes uncollected and negatively effects your bottom line. A/R is not cash. Hopefully, it will turn into cash for the company sooner than later, but big problems occur for companies with unpaid A/R.
For example, if you are short on cash because the A/R process isn't working, you might not have the option to take out loans for business projects or expansions, or even to cover things like payroll if you're really in a pinch. If you are able to get a loan, you'll lose cash in the future from paying interest.
Lost revenue is another impact of unpaid A/R. Eventually, aging accounts reach a threshold and write-offs takes place. Companies get what they can from 3rd party collection agencies resulting in massive losses and negative customer experiences.
A/R failures result in cash shortages and bottlenecked cash flow. From there, numerous consequences can occur. All can be avoided by keeping an eye on A/R KPIs and making immediate, proactive changes.
We have reviewed A/R basics, but how do you know if your process is broken? Are your goals and expectations being met? Are your measurements and KPIs on track with the industry? Maybe it's time to expect more? Here are a few symptoms to help you diagnose the problem:
Do you know what is your A/R cost? Check your AR cost in this simple calculator
A closed deal is great, but it's not over until money is in the bank. We've provided a few tips to help to boost A/R efficiency. We are addressing the other variables in our A/R equation. Moreover, keep in mind to continuously measure customer satisfaction for amazing results:
AI is a vital element of a successful Accounts Receivable process. Most businesses spend too much money and exhaust too many resources in chasing down payments. Even though most of the process hasn't changed in several decades, there is some software being developed providing necessary (and long overdue) innovation.
Using AI and automatization together is recommended. Since it's new technology being used in new ways, take a look at this article on AI and automatization.
“If you can't measure it than it can't be fixed.” A common phrase in business. Having strong A/R KPIs is key to understanding what's working and what needs improving.
Having a 360 degree view by combining metrics from customer experience and KPIs is best. It's important to have favorable ratios and high ROI, but we also want to factor in customer satisfaction.
Incorporating data can help cash forecasting. Most metrics are looking at what has happened in the past. Future cash flow metrics provide visibility to help predict A/R collection rates and dollar amounts. This data can be leveraged for business projects and growth.
Creating a process that is clear and transparent to customers is crucial for A/R collection success. Many businesses give great customer experiences, but forget to send the invoices and follow up. Sometimes, the invoice has errors or it's difficult to read. Other times, making the payment itself can be difficult and confusing.
Or, you remember your question regarding your bill at 10:00pm, but the Customer Service department is closed? It can be frustrating to make a payment or get quesitons answered when invoice content is unclear.
Self-serve software is a great remedy. Best practices include 24/7 accessiblity to to view bills, payment history, and make payments. In some cases, chat bots can resolve many customer quesitons.
Allow your customer to pay online when it's convenient for them, give them varied payment options, and make it simple to pay.
Have you ever tried to pay a bill and an office was closed for lunch or the Customer Service deparment was closed because it was after business hours? What happens if a customer is unable to pay the total amount due?
Be proactive and give them customized payment plans. This makes customers happy by helping them relieve financial stress and feelings of being overwhelmed. It helps everyone to have payment plans in place. It helps businesses with cash flow forecasting, and helps customers pay their bills within their capabilities. All of these are important metrics to track.
If you're looking for information on accounts receivable management, read our Accounts Receivable Management Guidelines and Tips.
siyea is smart software that helps you streamline your A/R process. With AI and automatization, you can reduce operational cost and increase revenue.