Accounts receivable management best practices: Ways to maximize efficiency and accuracy

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  1. Introduktion
  2. What is accounts receivable?
  3. Why is accounts receivable management so important for businesses?
  4. Accounts receivable management best practices
    1. Take advantage of automation and technology
    2. Be meticulous about credit management
    3. Refine your dispute resolution process
    4. Prioritize transparent and reliable communication in accounts receivable management
    5. Offer flexible payment conditions and options
    6. Make the most of data for more informed financial choices

Accounts receivable (AR) management is a complex function within a business, and includes credit policies, invoicing procedures, and collection tactics. Each of these processes comes with its own set of challenges and opportunities for improvement. For example, a well-crafted invoice can expedite payment timelines, while one that is confusing or unclear can lead to delays, disputes, or even legal action.

Automation can help businesses do more with many aspects of accounts receivable. Advanced analytics can predict payment behaviors, flagging potential late payments before they happen. Payment portals can offer customers flexibility, making it easier for them to settle their bills and reducing the workload on a business’s collections team. Automation gives businesses a variety of opportunities for customization. Tech solutions for accounts receivable management are helping businesses refine their financial operations: the accounts receivable automation market is expected to grow by 13.3% by 2030.

But relying on a powerful tech stack is not enough—to make the most of their resources, businesses need a carefully thought-out strategy. Below, we’ll share best practices businesses can use for accounts receivable management.

What’s in this article?

  • What is accounts receivable?
  • Why is accounts receivable management so important for businesses?
  • Accounts receivable management best practices

What is accounts receivable?

Accounts receivable refers to the money that a business has a right to collect from its customers for goods or services provided. When a company sells something but has not yet received payment, the amount due becomes part of accounts receivable. These receivables function as a short-term asset on a company's balance sheet, often appearing as an IOU from clients or customers.

Here’s what accounts receivable looks like in different sectors:

  • Creator economy
    Accounts receivable for those in the creator economy is the money owed to content creators or influencers by platforms, sponsors, or collaborators for content, partnerships, or advertising campaigns. This could be for videos, articles, podcasts, or other creative outputs that have been delivered by the creator but not yet paid for.

  • Ecommerce and retail
    For ecommerce and retail businesses, accounts receivable represents the money that customers owe the business for goods purchased, especially in scenarios where purchase orders are used or credit is extended. It might also include amounts due from certain payment gateways or third-party sales channels that have a delay in fund transfers.

  • Marketplaces
    Within marketplaces, accounts receivable can relate to funds owed by buyers to the marketplace for items purchased. Alternatively, it might represent money that the marketplace owes sellers for products sold, after deducting platform fees or other charges, especially if there's a payment schedule or holding period.

  • On-demand services
    For on-demand services, such as ridesharing, food delivery, or home services, accounts receivable denotes the money owed to the service provider by customers who have received the service but have not yet paid for it. It can also refer to funds to be received from intermediary platforms that manage transactions.

  • Platforms
    In the context of platforms, accounts receivable covers the amounts due from advertisers, subscribers, or any other entity that uses the platform for business purposes. Those could be for ad space, premium features, or any other monetized aspect of the platform.

  • Software-as-a-service (SaaS)
    For SaaS companies, accounts receivable represents money due from clients or businesses that have subscribed to or purchased software services but have not completed the payment. This might be for monthly subscription fees, annual licenses, or any custom software development.

  • Subscription
    In subscription-based businesses, accounts receivable indicates the money subscribers owe for accessing content, products, or services on a recurring basis. For instance, if a subscriber is billed monthly but hasn't yet paid for the current month, that amount would be part of the company's accounts receivable.

Why is accounts receivable management so important for businesses?

Accounts receivable is often dismissed as a routine concern for businesses, but as payment methods and terms become more advanced, a strategic approach to accounts receivable can offer businesses major benefits. These include:

  • Liquidity and solvency
    Managing accounts receivable in an effective way ensures that a business has enough liquidity to meet its short-term obligations. A delay in collecting receivables can strain a company's cash reserves, leading to challenges in covering operational expenses.

  • Operational efficiency
    Proper management allows businesses to identify inefficiencies in their billing and collection processes. Streamlining these processes can reduce the time between making a sale and collecting payment.

  • Financial health indication
    The status of accounts receivable can serve as an indicator of a company's financial health. A consistently high amount of outstanding receivables might indicate customer dissatisfaction or inefficiencies in the credit screening process.

  • Customer relationship management
    Reviewing accounts receivable regularly can help businesses identify customers who frequently delay payments. This information can guide decisions about extending credit to these customers in the future and maintaining healthy business relationships.

  • Revenue recognition
    For businesses that follow accrual accounting, revenue is recognized when earned, not when cash is received. Proper management ensures accurate revenue recognition and financial reporting.

  • Cost savings
    Efficient accounts receivable processes can reduce the costs associated with debt collection, bad debts, and administrative overhead.

  • Cash flow forecasting
    Predictable cash flows are important for planning, capital expenditures, and growth initiatives. Proper management helps businesses maintain accurate cash flow forecasting by providing clarity on when receivables are likely to be converted to cash. Funds that are tied up in outstanding receivables could be better used elsewhere, such as by investing in growth opportunities or filling necessary job roles. Efficient collection can open up these opportunities.

  • Bad debt reduction
    Effective management can lead to early detection of potential bad debts, allowing businesses to take timely actions such as setting up allowances or tightening credit policies.

  • Decision-making support
    Data from accounts receivable can provide valuable insights into sales trends, customer buying habits, and market conditions. These insights can inform business decisions, from product offerings to market expansion.

Accounts receivable management best practices

While there’s no fixed playbook for making the most of your accounts receivable management strategy, there are general best practices that most businesses will find helpful. These include:

Take advantage of automation and technology

Using technology as part of accounts receivable can refine business operations, allowing businesses to simplify and fortify their invoicing and collections processes. Here’s how automated AR can benefit businesses:

  • Expedited operations: Automation works in the background, executing repetitive tasks accurately and in a fraction of the time manual processes would take. Such speed leads to faster payment cycles, which can improve cash flow.
  • Precise execution, reduced errors: Manual processes, no matter how meticulous, are prone to oversights. Automation reduces these errors drastically, instilling confidence in the system.
  • Augmented resource allocation: With automation in charge of routine tasks, employees can focus on more complex, strategic aspects of AR management, driving value and innovation.

Automating typically involves incorporating tech integrations into your AR practices, which has additional upsides:

  • Synchronized software solutions: Choosing software that integrates with existing sales and service platforms makes invoicing almost instantaneous after goods or services are delivered.
  • Strategic automated reminders: By deploying automated reminders at specific intervals, businesses can nudge customers about impending or overdue payments. These consistent touchpoints help keep customers aware of their obligations.
  • Real-time data synchronization: Platforms with real-time syncing capabilities can provide an accurate view of the financial landscape, while preventing unnecessary or repetitive communications—respecting the customer's time and experience.

Be meticulous about credit management

Extending credit to customers, either in-house or by using a third-party partner, can open up new revenue streams, but not without bringing its own share of complications and liabilities. Fully understanding a customer's creditworthiness and managing these relationships can improve financial stability and reduce fiscal vulnerabilities. Here’s a rundown of credit management’s significance:

  • Risk mitigation: By understanding a customer's financial behavior and background, businesses can foresee potential payment pitfalls, thereby protecting themselves from future monetary setbacks.
  • Reinforced financial health: Vigilant credit management can keep a company's accounts receivable in check, preventing overwhelming bad debts that might affect liquidity.
  • Trust in business relationships: When credit terms are set based on detailed evaluations, it fosters an environment of trust. Both the business and the customer understand the grounds on which these terms are built, creating a mutually respectful relationship.

Here are some ways to advance your credit management practices:

  • Streamlined credit applications: Incorporate a consistent and thorough credit application procedure for all new customers. This sets the tone for a relationship built on transparency and mutual trust.
  • Rely on experts: Partnering with specialized credit reporting agencies can provide businesses with in-depth knowledge about the financial history of prospective clients. Such collaborations provide businesses with the data they need to make sound credit decisions.
  • Dynamic credit limit reviews: As business relationships evolve, so do order sizes and frequencies. It's imperative to periodically reassess and adjust credit limits for long-standing customers. This practice ensures that credit terms grow in tandem with the business relationship.

Refine your dispute resolution process

Disputes are inevitable, especially in fields such as ecommerce and SaaS. The manner in which a business manages these disagreements can impact both financial health and reputation. Effective dispute resolution not only smooths out the revenue cycle but also lays the groundwork for lasting customer relationships. Here’s why dispute management is so important for businesses:

  • Financial implications: Resolving conflicts in a timely manner often translates to quicker payments, which contributes to a healthy cash flow.
  • Customer loyalty: When disputes are handled with care and efficiency, customers feel valued. This can lead to stronger, more durable business connections.
  • Brand image: A business known for resolving issues adeptly is viewed positively in the market, which can be advantageous for client acquisition and retention.

Strategies for elevating dispute resolution:

  • Structured processes: Establishing clear, step-by-step procedures for handling disputes can streamline the resolution process. Clearly defined roles and responsibilities ensure that each team member knows what's expected of them when conflicts arise.
  • Documentation is key: Adopting a unified system to log and monitor all disputes helps in tracking progress and outcomes. This centralized approach brings transparency to the process while offering valuable insights for future reference.
  • Engaging with customers: Creating open dialogues with clients can unearth the root causes of disputes. Addressing these core issues directly can drastically reduce repeat conflicts, saving time and resources.
  • Empowering the team: Investing in comprehensive training programs that focus on negotiation tactics and superior customer service gives team members the skills to mediate disagreements tactfully and efficiently.

Improving your dispute resolution strategy can benefit your business. Beyond the immediate financial advantages, it positions your business as trustworthy and customer-centric, fostering growth and longevity.

Prioritize transparent and reliable communication in accounts receivable management

Strong, consistent, effective, and accessible communication practices are important for successful AR management. For AR, communication can:

  • Build trust: When customers feel informed and understand what to expect from a business, their trust grows.
  • Reduce ambiguities: Clear communication eliminates potential misunderstandings, which could otherwise lead to payment delays or disputes.
  • Reflect business image: A company’s communication methods and style, especially in written forms like invoices and reminders, demonstrates its professionalism and values.

Steps to enhance communication effectiveness:

  • Setting a predictable schedule: Creating a regular invoicing rhythm gives customers a sense of predictability. They can anticipate and plan for upcoming bills, making it easier to manage their own finances.
  • Simplicity and precision: Avoid convoluted language. Keeping communications straightforward makes them easier to understand.
  • Modernizing templates: Communication methods should evolve alongside businesses. Regularly revisiting and updating communication materials ensures they remain relevant and in line with contemporary business etiquette.
  • Promoting internal dialogue: A well-informed and cohesive internal team leads to better interactions with clients. Provide open channels in which team members can discuss AR strategies, customer feedback, and any challenges they face. This internal collaboration often results in improved customer interactions.

Strong communication in AR management can reduce potential friction points in the billing cycle and create lasting, positive relationships with clients. Over the long term, these benefits contribute to steady revenue streams and a trustworthy business image.

Offer flexible payment conditions and options

Adjusting payment conditions based on individual client histories and behaviors helps cultivate relationships, rewards loyalty, and safeguards business interests. Benefits of flexible payment conditions include:

  • Strengthening client relationships: Offering favorable conditions to regular clients rewards them for their consistency while encouraging them to continue doing business with you.
  • Mitigating financial exposure: Asking newer clients or those with less predictable payment behaviors to make an upfront partial payment reduces the risk of total nonpayment.
  • Encouraging positive payment practices: Early payment discounts can incentivize clients to prioritize payments to your business over others, potentially speeding up the payment cycle.

Here’s a quick rundown of points to consider around dynamic payment implementation:

  • Client history evaluation: Review the payment history of each client. Are they often late? Do they generally pay early? Using this data helps determine which terms might be most appropriate for each client.
  • Scaled payment options: Instead of a one-size-fits-all payment term, businesses can offer customers a range of options. For instance, consistent payers might be given the option of extended terms with a small discount for early payment, while those with a less consistent history might be offered standard terms but with the option for installment payments.
  • Regular review and adaptation: Businesses should regularly review the effectiveness of their payment terms. Are they resulting in faster payments? Are clients taking advantage of the offered discounts? This ongoing review allows businesses to tweak and adapt their offerings for optimal results.

By tailoring payment terms—recognizing and valuing consistent clients while also being prudent about potential financial risks—businesses can develop better client relationships. This approach offers direct financial benefits in addition to supporting a business’s long-term health and reputation.

Make the most of data for more informed financial choices

Using complete, accurate data can significantly influence the effectiveness and predictability of incoming funds. Here are some key benefits of strong data usage:

  • Improved predictability: By closely monitoring payment histories, businesses can anticipate when payments will come in, making financial planning smoother.
  • Risk mitigation: Recognizing patterns of late payments or missed payments allows businesses to address these issues early, either by adjusting terms or increasing follow-up efforts.
  • Efficient resource allocation: Understanding which accounts might pose problems can allow a business to allocate its resources more effectively and avoid wasting time in chasing unlikely payments.

Here are some ways to use payment data for a better approach to accounts receivable:

  • Payment trend analysis: This involves reviewing the timelines and regularity of customer payments. Over time, these patterns can offer insights into potential changes in a customer's financial health or the effectiveness of your invoicing strategies.
  • Performance metrics: Monitoring metrics like the average time it takes from making a sale to receiving payment can offer insights into operational efficiency. A shorter time suggests effective AR practices, while longer periods might indicate areas for improvement.
  • Predictive analysis: Predictive analysis means using data from past behaviors to predict future outcomes. For instance, if a business notices that clients from a particular industry often delay payments during certain months, the business can anticipate this trend in the future and plan accordingly.

Using data in this way allows businesses to make smarter decisions, anticipating challenges and addressing them in advance. This shift not only improves cash flow but can also lead to stronger client relationships.

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