Accounts receivable (AR) is the money your business is waiting to receive from customers who have purchased goods or services on credit. A healthy AR balance means you can pay your bills, invest in new opportunities, and keep things running smoothly. But mismanaged AR can cause operational disruptions, and late payments or errors in invoicing can result in cash crunches – forcing you to draw from reserves or take on debt. This creates direct costs and can strain relationships with suppliers and customers.

On average, avoidable rework in accounting departments can take up to 30% of a full-time employee’s time. Automation can free up that time by simplifying the entire AR process, reducing human error, and accelerating collections. Finance automation tools handle invoicing, payment reminders, and reconciliation. This helps maintain a steady cash flow, makes financial planning more predictable, and increases your business’s resilience.

Below, we’ll explore how these automation tools can help with AR, including their benefits and how they can help you shift focus from administrative tasks to business growth.

What’s in this article?

• What is accounts receivable?
  
• What is the role of accounts receivable in business finance?
  
• Challenges in traditional AR management
  
• What are finance automation tools?
  
• Features of AR automation tools
  
• Finance automation’s benefits in accounts receivable
  
• Challenges of automating accounts receivable
  
• How to pick an AR automation tool
  
• How to implement AR automation tools
  

What is accounts receivable?

Accounts receivable refers to the money a business is owed by its customers for goods or services that have been delivered but not yet paid for. When a company sells its products or services on credit, it records the amount due from customers as accounts receivable on its balance sheet.

For example, if your business sells a product to a customer with a payment term of 30 days, you record the billed amount as AR until the customer pays the invoice. This practice is common in many industries because it allows customers the flexibility to pay over time, which can encourage larger purchases and repeat business.

What is the role of accounts receivable in business finance?

Here’s how accounts receivable affects the overall finances of a business.

• Cash flow: AR is an important source of cash inflow. As customers fulfil their payment obligations, the company can use these funds to cover immediate expenses, invest in growth opportunities, and maintain a healthy cash balance.

• Working capital: AR is a substantial portion of a company’s working capital. A strong AR balance ensures that the company has sufficient liquid assets (cash and assets easily convertible to cash) to meet short-term financial obligations such as paying suppliers and employees and other operational costs.

• Revenue recognition: AR allows businesses to recognise revenue from credit sales at the time of the transaction, even before receiving actual payment. This aligns revenue with the period in which it is earned and provides a more accurate, comprehensive picture of financial performance on the income statement.

• Turnover ratio: The AR turnover ratio, which measures how quickly a company collects its receivables, is an important indicator of operational efficiency and financial health. A higher turnover ratio signifies prompt collections and effective credit management.

• Credit risk: AR inherently risks customers failing to fulfil their payment obligations. Good credit risk management involves evaluating customers’ creditworthiness before extending credit, setting appropriate credit limits, and monitoring payment behaviour.

Here’s how effective AR management can improve a business’s financial situation.

• Financial resilience: A company can strengthen its financial resilience through effective AR management, which ensures a steady stream of cash inflow. This mitigates the impact of bad debts and provides a buffer against unforeseen economic downturns.

• Profitability: Effective AR management minimises the occurrence of bad debts (uncollectible invoices that result from customer defaults). By implementing strict credit policies, conducting thorough credit checks, pursuing timely collections, and consequently reducing bad debt expenses, companies can safeguard their profitability.

• Financial forecasting and management: Effective AR management involves meticulously tracking outstanding invoices, predicting collection patterns, and employing strategies to accelerate payment cycles. This enables the company to accurately forecast cash flows, identify potential shortfalls, and take corrective measures to maintain consistent cash availability.

• Credit policies: With AR management, a company formulates and implements credit policies that balance the desire for increased sales with the risk of non-payment. These policies outline credit limits, payment terms, and late payment penalties. They also provide a framework for sustainable credit sales.

• Customer experience: Timely and accurate invoicing, transparent communication regarding payment expectations, and flexible payment options contribute to a positive customer experience. Satisfied customers are more likely to do repeat business, recommend the company to others, and become long-term advocates.

Challenges in traditional AR management

Here are some challenges of accounts receivable management.

• Slow payment cycles and collection delays: Late payments can be a persistent issue that creates cash flow disruptions and increases working capital requirements.

• Manual processes: Traditional AR management often relies on manual data entry, invoicing, and payment processing. This can lead to errors, inefficiencies, and delays.

• Limited visibility and reporting: Lack of real-time insight into AR data can make it difficult to track outstanding invoices, identify potential bad debts, and make informed decisions.

• Dispute resolution: Resolving invoice disputes and discrepancies with customers can be a time-consuming and resource-intensive process that impacts customer relationships and cash flow.

• Difficulty scaling with growth: As businesses expand, managing AR becomes more difficult. Manual processes might not be able to grow, which can lead to increased workloads and potential bottlenecks.

• Lack of automation and integration: Traditional AR systems often lack automation capabilities and integration with other financial systems, which creates fragmented workflows and data silos.

• Inadequate credit policies and risk management: Weak credit policies and inadequate credit risk assessment can increase bad debts and financial losses.

• Costly collections: Pursuing collections for overdue invoices can be costly and require resources for communication, legal actions, and potential write-offs.

• Difficulty adapting to changing regulations: Evolving financial regulations and compliance requirements can pose challenges for traditional AR management practices.

What are finance automation tools?

Finance automation tools are software applications designed to automate a company’s financial operations. They aim to reduce manual effort, mitigate errors, refine operations, and provide better financial control and visibility.

Here’s a look at the key categories and functionalities of finance automation tools.

• Accounting software: This software automates the recording of financial transactions and generation of financial statements. It also helps with compliance in accounting standards. Examples include QuickBooks, Xero, and Sage.

• Invoice and billing systems: These tools automate the invoicing process. They send bills to customers, track payments, and manage AR. They can also handle recurring billing and subscription management.

• Expense management: This software helps businesses track employee expenses, automate expense approvals, and integrate with accounting software for reconciliation. Tools such as Expensify and Concur simplify the expense reporting process and policy compliance.

• Payroll systems: These systems automate wage calculations, salary distributions, and tax filings. They also improve accuracy and compliance with employment laws. Examples include ADP and Paychex.

• Budgeting and forecasting tools: These tools provide platforms for establishing financial goals, preparing budgets, and forecasting future financial performance.

• Procurement and spend management: This software automates procurement processes, from purchase order creation to payment processing. It helps businesses manage their spend more effectively and negotiate better terms with suppliers.

• Financial reporting and analytics: Tools such as Tableau or Microsoft Power BI can visualise financial data, create interactive reports, and inform strategic decisions through new insight.

• Tax preparation software: This software automates the preparation of tax returns and simplifies compliance with tax regulations. It also simplifies the tax filing process by reducing errors and maximising deductions.

• Treasury management systems: These systems manage a company’s liquidity, handle cash and investments, and suggest strategic decisions to improve the financial health of the organisation.

• Credit management: These tools assess credit risk, manage credit policies, and automate credit scoring and approvals.

Features of AR automation tools

Here are some expected features of AR automation tools.

• Invoice management: AR automation tools automatically generate, send, and track invoices. They can customise invoices based on client requirements; track their statuses in real time; and notify you when they’re opened, due, or overdue.

• Payment processing: AR tools can facilitate the acceptance of payments through various channels and automatically reconcile these payments against outstanding invoices.

• Credit management: You can use AR tools to assess customers’ credit risk and make informed decisions on credit limits and terms. They can also track customer payment behaviours and help you proactively manage credit risk.

• Cash flow forecasting: AR automation tools can use historical data to forecast future cash flows. This feature helps you confirm that there are sufficient funds to cover upcoming expenses.

• Dunning management: You can send automated reminders to customers about their payment due dates. This dunning process is customisable, and you can escalate communications based on how overdue the payments are.

• Reporting and analytics: AR tools provide detailed reports and analytics that help you understand your AR health, identify trends, and make informed decisions. These can include ageing reports, collection reports, and performance dashboards.

• Integration capabilities: Most AR automation tools can integrate with other business systems such as customer relationship management (CRM) software, accounting software, and enterprise resource planning (ERP) systems. This provides a holistic view of your business finances and customer interactions.

Finance automation’s benefits in accounts receivable

Here’s how finance automation tools can help with accounts receivable.

Faster invoice processing and payment cycles

• Automated invoice creation, delivery, and tracking reduce manual tasks and processing time.

• Automated payment reminders and dunning emails encourage timely payments from customers.

• Integration with online payment gateways facilitates faster and more convenient payment options for customers.

Improved cash flow and reduced days sales outstanding (DSO)

• Faster payment cycles lead to quicker cash inflows, which improves liquidity and reduces the average time it takes to collect receivables.

• Automated collection processes help address late payments promptly. This mitigates bad debts and maximises cash recovery.

Reduced errors and increased accuracy

• Automation reduces manual data entry errors. This leads to more accurate invoicing and payment information.

• Automated reconciliation processes match payments to invoices, preventing discrepancies and saving time.

Visibility and reporting

Real-time dashboards and reports provide insight into outstanding invoices, payment status, ageing reports, and customer payment behaviour.

Data-driven insight enables better decision-making regarding credit policies, collection strategies, and customer relationships.

Productivity

• Automating repetitive tasks frees up AR staff to focus on strategic activities such as credit analysis, CRM, and dispute resolution.

• Refined workflows reduce manual intervention, minimise bottlenecks, and improve overall AR processes.

Resource allocation

• Automation reduces manual labour, which saves costs in payroll and operational expenses.

• With fewer errors and faster processing due to automation, time and resources are freed up to allow for better staff allocation.

Customer satisfaction

• Timely and accurate invoicing, transparent communication, and convenient payment options improve the customer experience.

• Self-service portals empower customers to independently view invoices, make payments, and manage their accounts.

Scalability and adaptation

• Automated AR solutions can easily scale to accommodate business growth and higher transaction volumes.

• Finance automation solutions can adapt to changing business needs and regulatory requirements for long-term effectiveness.

Compliance and risk management

• Automation helps with adherence to financial regulations and internal controls.

• Automated credit checks and risk assessment tools help mitigate credit risk and minimise bad debts.

• Audit trails provide transparency and traceability.

Competitive advantage

• Optimised AR processes and improved efficiency can give a business a competitive edge in the market.

• Faster payments and better customer service can differentiate a company from its competitors.

Challenges of automating accounts receivable

Here are some challenges of AR automation.

• Implementation: Implementing AR automation software can require a major up-front investment in software licences, hardware, and training. Smaller businesses with limited resources might find it challenging to justify the initial costs. Integrating new automation tools with existing systems and processes can also be complicated and time-consuming.

• Change management: AR automation often involves changes to existing workflows and job roles, which can lead to resistance from employees who are accustomed to traditional methods. Businesses will need to train and communicate with employees to ensure successful adoption.

• Data quality and integration: Automation relies on accurate and consistent data. Inaccurate or incomplete data can create errors and inefficiencies in automated processes. Integrating AR automation with other financial systems such as ERP or CRM platforms can also be challenging and requires careful planning.

• The right solution: The market offers a wide range of AR automation tools with varying features and functionalities. A company might have difficulty selecting the solution that aligns with its specific needs and budget.

• Technical challenges: Technical issues such as software bugs, system downtime, and compatibility problems can disrupt AR processes and cause delays.

• Data security and privacy: AR data often includes sensitive customer and financial information. This data must be kept private and secure to prevent unauthorised access or breaches.

• Evolving technologies and regulations: AR automation technologies are constantly evolving, so businesses must stay updated and adapt to new features and capabilities. Changes in financial regulations or compliance requirements can also require adjustments to automated processes.

• Exceptions and complex scenarios: While automation can easily handle routine tasks, complex scenarios or exceptions might require human intervention. Businesses must define escalation procedures and train staff on how to handle exceptions.

• Demonstrating value: Calculating the return on investment (ROI) of AR automation can be complex. Businesses must track key performance indicators (KPIs) and quantify the impact of automation on efficiency, cost savings, and customer satisfaction to determine its value.

How to pick an AR automation tool

Picking the right AR automation tool can be a hurdle. Here’s how to navigate this task.

Assess your needs and priorities

• Identify the specific challenges you want to address with AR automation. Are you struggling with slow payment cycles, manual errors, or limited visibility into your AR data?

• Based on your challenges, prioritise the features that are most important to you. Do you need automated invoice processing, payment reminders, or integrated reporting capabilities?

• Determine your budget for AR automation software. Note that your budget can determine which solutions are available.

Research available options

• Assess different AR automation software vendors and compare their offerings. Consider vendors with proven track records and positive customer reviews.

• Read online reviews and case studies to get insight into the experiences of other businesses using the software.

• Attend webinars or request demos from vendors to try their software and ask questions.

Evaluate key features and functionality

• Seek automated invoice creation, delivery, and tracking capabilities.

• Find software that supports multiple payment options and integrates with your accounting system.

• Consider features such as automated payment reminders, dunning emails, and collections workflows.

• Seek customisable dashboards and reports that provide insight into your AR data.

• Ensure the software can integrate with your existing systems, such as your ERP or CRM platform.

Consider scalability and flexibility

• Choose a solution that can grow with your business.

• Find software that allows you to customise workflows and features to fit your specific needs.

• Consider whether a cloud-based or on-premise solution better suits your company’s infrastructure and security requirements.

Get feedback and involve stakeholders

• Get feedback from your AR team on their needs and preferences.

• Consult your IT department to confirm the software is compatible with your existing systems and meets your security standards.

• Secure buy-in from management so that the project has the necessary resources and support.

Request a demo or trial

• Request a demo or trial of the software to test its functionality and user-friendliness.

• Ask the vendor questions about the software’s capabilities, implementation process, and customer support.

• Compare pricing from different vendors and negotiate the best deal for your company.

Decide and implement

• Select the AR automation tool that best meets your needs, budget, and future goals.

• Work with the vendor to develop an implementation plan and timeline.

How to implement AR automation tools

Here’s a step-by-step guide to implementing AR automation tools into your business:

• Define objectives: Outline your goals for AR automation and which metrics you want to improve.

• Assemble a project team: Identify key stakeholders from AR, finance, IT, and other relevant departments. Assign roles and responsibilities for each team member.

• Create a project plan: Develop a detailed project plan with timelines, milestones, and resource allocation.

• Clean your AR data: Check your existing AR data for accuracy and completeness. Remove any inconsistencies or errors before migrating data to the new system.

• Configure the system: Customise the software to fit your specific workflows and business rules. Configure settings for invoice templates, payment terms, dunning tactics, and reporting.

• Integrate with existing systems: Integrate the AR automation tool with relevant systems such as your accounting software, ERP system, and CRM platform.

• Test: Comprehensively test the integrated system to ensure smooth data flow, accurate calculations, and simple functionality. Test different scenarios including invoice processing, payment application, and reporting.

• Train your users: Thoroughly train all users on the new system. Cover all aspects of the software, from basic navigation to advanced features.

• Address staff concerns: Communicate the benefits of AR automation to your team and address any concerns or resistance. Encourage user adoption by emphasising the positive impact on their workflows.

• Begin a phased rollout: Consider a phased rollout to mitigate disruption. Start with a pilot group or a specific AR function before expanding to the entire department.

• Provide support: Provide ample support during the go-live phase to address any issues or questions that might arise.

• Monitor performance: Track KPIs to measure the impact of AR automation on your goals. Monitor metrics such as DSO, collection rates, error rates, and customer satisfaction.

• Continually improve: Regularly analyse data to identify areas for improvement. Gather feedback from users and make necessary adjustments to workflows and configurations.