CFO Service Finance & Accounting

6 Ways to Conquer Major Accounts Receivable Challenges

A business’ most important processes might account receivables (AR). The top reason is bad AR management can result in low cash inflows and it’s also tough to manage AR. The AR process cycle results in many challenges that companies have to deal with. Two studies done recently have found these challenges.

Pay-stream Advisors is an independent research/advisory company. It did a study among finance pros to learn their main challenges in terms of their accounts receivables services. The survey revealed the top 3 challenges that include increasing AR staff productivity, lowering Days Sales Outstanding (DSO) and lowering portfolio risk. Nearly 90% of the respondents had DSO challenges while the other two were encountered by 86%/84% of the survey’s respondents.

A related survey was conducted by Direct Incite. The company provides various invoice solutions. It discovered that companies have problems controlling their labor costs, customers struggling with electronic invoices, and attempts by customers to extend terms. This can result in payments that are the default, delayed, or missed.

In the case, companies are able to control AR processes the challenges can be handled in a short time. The key is for companies to understand/use the best steps and also related tools in order to overcome the challenges effectively. Here are some steps they can do:

Improving AR Productivity

Improving AR productivity is linked closely to how a business conducts AR processes. Although most companies use ERP/account system for the purpose of AR management they still need a big amount of manual labor/time in order to manage the process of invoice collection. Based on these manual processes collectors must spend much time finding customer data, correcting data errors, updating spreadsheets, and other activities. They should be spending more time talking with customers, solving disputes, and doing other activities that can speed up payments.

The best step for improving AR productivity might be automating the AR process. Automating this process and making AR data central to offer collectors times they need to focus on core activities that can help your business get paid at a faster rate.

Automation can also help to boost performance and decrease transaction costs. A 2012 survey showed that 85% of credit/AR respondents think that electronic invoicing speeds up the process of collections.

The problem is manual AR processing can be expensive and inefficient. An automated solution can help to streamline a company’s process.: This allows the AR team to boost cash flow and lower the operating costs. Customer service can also be improved. There are other benefits including solve payment delays and customer battles, etc. The result of no requirement for rekeying order info. this lowers the need for lower storage costs and invoice filing.

Lowering DSO

DSO is a calculation about how fast/slow a company is able to collect on AR. A company can lower the DSO to greatly improve its cash flow. There are various ways to achieve this goal including the following:

• Incentives

In the case your company offers discounted products there’s a chance you might get faster payments. One option is early payment incentives like a small discount to customers who make payments early. Here’s an example, you could offer customers a discount if they pay within 7/10 days. The discount can be offset easily by making the cash flow faster. This produces savings on loan fees and results in similar/better discounts from your creditors.

• Bad clients

It’s not good to do business who delays/defaults on payments from time to time. It’s important to check customers who are constantly paying on time and others that are inconsistent. A company literally can’t afford to waste time/effort on customers who don’t pay on time. It’s a good idea to consider dropping such customers since they can cause you a lot of problems.

If you’re having problems with customers paying on time then you should consider looking for new clients. It’s better to do business with them because they’ll probably be more reliable about paying you on time. This can be a plus for your company since it can provide a steady source of income.

• Billing

If you want to reduce DSO this is one of the first steps to take. It’s about sending out invoices on time. They should be sent on in theory right after a product or service is sold. Companies must make sure that billing addresses have been verified before sending out bills. If your company learns that a manual process takes too much time it’s a good idea to use electronic invoicing instead.

The more time that’s needed for a client to get an invoice the more time it will take for you to get your money. So, make sure you send out invoices quickly. Even in the case, you’re not right away the customer can ask questions. You’ll also have the chance to fix any issues that can be a result of late payment.

It’s also important that you communicate billing policies clearly with customers. For example, there are companies that want to get payments after customers get the products/services. However, other companies require about half of that figure and the rest at a later time. It’s important for customers to know how much and when they’re required to pay.

• Payment Methods

If you only allow cash payments it can cause delays when you want to collect payments. You can solve this problem by accepting credit/debit cards or allowing your customers to make automatic payments. You could have an authorization form for credit cards in order to charge the cards with the amount due.

You can change the card based on a schedule, which can help to boost your cash flow. Another option is to allow customers to pay invoices on the Internet. Regardless of the method, you pick it’s critical the payment terms/due dates are clear on invoices. That should also be the case when sending out other communications to customers.

Lower Portfolio Risks

Keep in mind there’s a clear difference between good and bad credit risk. There are various factors that distinguish the two.