7 Best Practices You Need to Optimize Your Accounts Receivable

Accounts receivable management can have a huge impact on your business, with cash flow, client relations and employee efficiency all dependent on a well thought out and properly executed system. Whether you’re starting from scratch or looking to improve the methods your company already has in place, it’s important to implement accounts receivable best practices within your organization.

All money listed on a balance sheet as owed by customers for products and services already delivered is classed as accounts receivable. Offering purchases on credit is common in business, but should be a short-term situation and not be allowed to spiral out of control. A regular turnover ratio analysis should be carried out to provide an accurate picture of when accounts receivable are likely to be paid.

How to improve your accounts receivable

There are a number of strategies that can be adopted to ensure your accounts receivable are properly managed. While making one small change may improve the situation, a combination of multiple approaches is likely to have the biggest impact and could dramatically affect the success of your business.

1. Outline your credit policy

Transparency is key and communicating your credit policy to your customers will help you to manage expectations. Be sure to document the process you expect everyone in your organization to follow to ensure there’s no oversight and that the procedure is standardized for every client and all departments.

Among the information provided, make sure you cover:

• Billing periods
• Invoicing dates
• Key information to be included on invoices as standard
• Recordkeeping processes
• Follow-up procedure
• Collection system for overdue payments

2. Establish and measure the right KPIs

The metrics you use to measure your accounts receivable are key to ensuring you get a clear picture of the working capital available to your business. Key performance indicators (KPIs) will help you to achieve this but only if you select the most appropriate ones for the situation. Here are some of the options to choose from :

• Days Sales Outstanding (DSO): The average number of days it takes your company to collect payments. A high DSO is bad for business, while a low figure will ensure you have the cash flow to keep operating.
• Best Possible Days Sales Outstanding: Calculating the best possible DSO will give you a baseline measurement to compare the actual DSO your company is dealing with.
• Average Days Delinquent (ADD): A way of identifying repeat offender clients who often pay late. ADD shows the average time elapsed between when an invoice was due and when it was paid.
• Collections Effectiveness Index (CEI): Displays the effectiveness of receiving payments from customers within a set period as a percentage. Numbers above 80% are considered good.
• Accounts Receivable Turnover Ratio: A metric to assess how efficiently your organization manages credit. A high turnover ratio is a positive sign that your operations are working well.

3. Automate accounts receivable

Automation is an effective way of freeing up staff and reducing errors in a wide range of areas of business and accounts receivable is no different. Enterprise resource planning (ERP) software that helps to manage day-to-day tasks is one way to achieve this. Some 61% of professionals across all sectors have found it has increased operational efficiency.

4. Build a plan for following up on late payments

Late payments are a fact of business, but having a plan in place to track them, chase them up and not let them continue for too long is vital to minimize their impact on your organization’s viability. Research by payment giant BACS discovered 76% of businesses face late payments of up to six months beyond the terms agreed in contracts.

Your system for requesting payments should include easily usable templates to chase debtors at every stage of the process. From reminders that payments will be due soon to messages that they should be settled now, right the way through to overdue and very late payment notices, having these templates ready will allow you to deploy them when necessary.

5. Proactively collect payments

In order to proactively chase payments, all elements of the process must be up-to-date and staff should be confident they’re not asking for money for an account that’s already been settled. By putting a transparent system in place, a collection policy can be established to minimize the danger of a client defaulting. Accurate reporting and automated receipts will empower your team to be proactive in collecting payments.

6. Provide early payment discounts

While offering discounts on payments may not sound conducive to good cash flow, incentivizing the early settling of accounts can have many benefits. These include cutting down on risk, reducing the need for funding and protecting your own supply chain, all of which can save your business money in the long run.

Two popular methods for offering early payment discounts are static and tiered. Static discounting involves outlining in the invoice that a predetermined amount or proportion of the total will be removed if the bill is paid within a set time. A tiered system presents a greater reduction the quicker the payment is received. That means if they miss the first tier of discount, there’s still an incentive to pay relatively promptly.

7. Make payments as simple as possible for customers

Reducing the barriers to payment is among the most effective ways to get customers to settle their debts quickly. All businesses work in different ways, so offering a selection of ways to pay, from credit and debit cards to electronic funds transfers (EFT) is a good place to start. As well as these measures, steps like adding a payment link to an invoice make the whole process simple, so it’s less likely to be put off until another time.