Do You Have a Reliable Accounts Receivable Process in Place?
If someone were to ask you, could you confidently tell them that you have a reliable accounts receivable process?
If the answer is no, it may be important to review what you have in place and see if everything is on track with best practices that can set your business up for greater success.
Accounts receivable refers to the amounts owed to a business by its customers or clients for goods or services provided on credit. It can include unpaid invoices from sales, outstanding balances, and installment payments.
Why You Need An Accounts Receivable Process
Without a strong accounts receivable process, small businesses can experience major challenges and missed opportunities.
Cash flow is crucial for businesses to meet their own financial obligations, yet accounts receivable can impact cash flow through:
Delayed Payments: Customers or clients may delay payments, impacting your business's cash flow and financial planning.
Bad Debts: Unpaid invoices may have to be written off as bad debts
Payment Disputes: Resolving payment disputes without a solid accounts receivable process can be time-consuming and resource-intensive.
Lack of Follow-Up: Inconsistent or ineffective follow-up on overdue accounts can result in prolonged outstanding balances.
Inefficient Invoicing: Inaccurate or delayed invoicing processes can lead to delays in receiving payments.
Opportunities From a Reliable Accounts Receivable Process
Better cash flow and a strong accounts receivable process presents many opportunities including improved:
Information for decision-making based on more accurate financials.
Opportunities for growth such as investing in more service offerings, advertising, or staff.
Customer satisfaction built from having a clear process.
Peace of mind knowing that there is an organized accounts receivable system in place.
Strategies for a Better Accounts Receivable Process
Now let’s dive into how you can improve your accounts receivable process.
First, choose a software that meets your business needs. The right software can assist with nearly every step of your accounts receivable strategy, including automating tasks, measuring KPIs, and providing training resources for employees.
Set and Measure Goals
Investing in a better accounts receivable process should be done with your business’s goals in mind. Think about what is driving your business, and how accounts receivable ties into larger goals.
For example, if your goal is to hire new staff in the next year, improving your accounts receivable process may tie into this by improving cash flow.
Next, determine key performance indicators (KPIs) that you’ll use to measure the success of your program, which could include:
Days Sales Outstanding (DSO): Measures the average number of days it takes to collect payment from customers after a sale is made.
Aging of Accounts Receivable: Analyzes the distribution of outstanding receivables by the length of time they have been outstanding. It helps identify overdue accounts and prioritize collections efforts.
Bad Debt Ratio: The percentage of total sales that cannot be collected due to customers' inability or unwillingness to pay.
Percentage of Overdue Receivables: The percentage of accounts receivable that are past due compared to the total outstanding receivables.
Average Collection Period: The average number of days it takes to collect payment from customers.
Accounts Receivable Turnover Ratio: Calculates how many times during a specific period (usually a year) accounts receivable are converted to cash.
Collection Effectiveness Index (CEI): Measures the effectiveness of collections efforts by comparing the amount of cash collected during a period to the total outstanding accounts receivable.
Improve Customer Payment Experiences
Ensuring customers have a positive experience is important to businesses, and improving accounts receivable systems is one way to create a smoother customer experience. Some best practices supporting your customer's payments include:
Ensure you have a clear policy outlining payment terms to minimize misunderstandings.
Offer incentives such as discounts or rewards for early payment.
Offer payment plans to meet a variety of needs.
Charge reasonable late fees for delayed payments.
Provide a variety of payment options such as credit card, bank transfer, and cash.
Use your software to its full advantage, including automating invoicing, payment reminders, and collections.
Staff Training and Team Support
Ensure that staff members are trained on best practices for accounts receivable management and customer communication. This includes training on your software and its latest features, and revisiting regularly so your staff have the tools available to implement your processes.
If you find it’s too much for your team, consider hiring a specialist firm that can support you in creating a better process. Consider factors such as their qualifications, services offered, software support provided, and pricing structure. Learn what to expect if you’re not used to outsourcing tasks.
Better Accounts Receivable Could Be Nearer Than You Think
If you’re ready to improve your accounts receivable process, but don’t want to spend too much time worrying about the details, our team is available to discuss your needs.
Accounting Made Accessible is here to help you every step of the way.
Book your free strategy call today, and let us do the accounting while you focus on your favorite parts of running a business.