Struggling with accounts receivable management? It’s a common problem for small businesses as delinquent B2B payments climb. If not addressed, it will impact your business’s ability to pay its own bills today and its strength tomorrow.
On this page, we’ll go over ten accounts receivable best practices that will help you streamline your AR processes and improve their effectiveness, so you can start collecting faster and more fully.
1. Perform Credit Checks and Ensure the Creditworthiness of Potential Clients
Check the credit of potential clients long before any invoices are sent. Invoices are the equivalent of a short-term loan and not everyone is worthy of one, let alone capable of paying off the same amount.
Many companies offer credit checks, and you can even pull them from multiple credit bureaus. However, if you’re working with a factoring company, they’ll often handle the credit check for you. That’s because invoice factoring gives you immediate payment for the invoice, but it’s the client who ultimately pays the balance off when they pay their bill.
2. Outline Clear Billing Procedures
On one hand, clear billing procedures guide your team. When everyone knows how things should run, collections are handled with more consistency and you’re less likely to run into issues with late or non-payments.
On the other hand, clear billing procedures are good customer service. Your clients should know when and how to pay as well as what will happen if they don’t take care of a bill on time. Your business may face legal issues if you aren’t informing clients of the expectations. You’ll generally need to have them sign a contract too. More importantly, though, your procedures and policies should encourage timely payment, not just serve as a punitive system for slow payers.
Write down your procedures and share them with the team for these reasons. Customers should have access to your policies, and they should be included on their invoices too.
3. Stick to Your Credit and Collections Policies
Consistency is the key when it comes to credit and collections policies. Everyone on the team should follow them with every client. This not only helps ensure that you don’t wind up with bad debt but also eliminates confusion and potential hard feelings with clients. For example, your client may logically understand why someone is applying a credit limit on their order, but if they’ve never had someone impose the limit before or it differs based on who takes the order, there’s bound to be some confusion and emotions involved.
4. Ensure Your Invoice Process is as Accurate as Possible to Avoid Disputes
More than half of all finance officials say billing disputes are one of their greatest challenges, according to PYMNTS research. It can be something as little as a miskeyed address or incorrectly logging the name of the person authorizing the purchase that calls the whole invoice into question. Nine in ten finance officials report that they’re manually entering at least some of the billing information. Considering that the average person makes eight mistakes per 100 words according to Grammarly research, and 88 percent of spreadsheets have errors according to Forbes, it’s easy to see how invoices can quickly become riddled with errors.
If you discover invoices are going out with errors, explore safeguards you can put in place to ensure the issue does not continue. Bear in mind that it’s rarely a matter of telling your team to be more careful. Instead, you may need to create a checklist or have multiple team members review orders and invoices throughout the process to ensure accuracy.
5. Consider Investing in Electronic Billing and Payment Systems
Switching to a modern invoicing system will allow you to automate all kinds of processes. For example, most systems can automatically copy over client and invoice data to eliminate manual entry and errors. A good system will automatically follow all your processes too, such as sending invoices and reminders at your desired intervals. This also improves accuracy and reduces labor.
One of the best things about electronic billing systems, however, is that many integrate client payment solutions. That way, your clients can review their invoices online and make payments more easily. This is naturally a boon for customer service, but it speeds up your payments.
Nearly three-quarters of CFOs say their AR processes are digital or will be within the next year, according to PYMNTS surveys. Going digital is no longer a matter of gaining a competitive edge—those who don’t are being left in the dust.
6. Incentivize Timely Payment
Businesses often charge a flat fee or a percentage of an invoice’s value when payment is not made on time. Create a similar policy and include it in your documentation to incentivize payment. For the sake of customer service, though, it’s best to give a reminder just before payment is due. Giving clients that final nudge as the due date approaches can also speed up payments.
7. Start Calling and Put Delinquent Accounts on Hold Immediately
The longer a bill remains outstanding, the less likely your business is to collect on it. Start reaching out to clients the day after payment should have been made. Phone calls are highly effective. However, many businesses also start with text and email messages that say something along the lines of “Oops! You missed a payment,” then move into more aggressive messages about the penalties associated with not paying a balance as time goes by.
Put accounts on hold as soon as a payment is missed too. The larger the bill is, the less likely the company is to pay it and they shouldn’t be given the opportunity to leverage credit when they’re not in good standing.
8. Follow Up Frequently and Consider Offering Payment Plans
Your approach to collections should change with the age of the balance. For example, your earliest messaging should be more along the lines of identifying why the payment has not been made and how you can get the client to remit payment. It can be especially helpful to offer payment plans in these early stages too. Bringing in some income is better than bringing in none and your thoughtfulness will help maintain a strong relationship.
If weeks pass with no payment, the approach should become more aggressive. The client should receive notice of any late fees that have been applied to their balance and a reminder of when the next cycle will hit. If you work with collections agencies or report to credit bureaus, include this in your later messaging too.
9. Prepare for Delays
There’s always some potential for delayed payments but they can skyrocket during difficult economic times. It’s helpful to have backup funding because of this. Invoice factoring can help here too. Even if you don’t normally use factoring to accelerate your payments, you can set up an account in advance and only leverage it when you’re experiencing a cash flow crunch.
10. Track the Effectiveness of Your Accounts Receivable Management Using KPIs
As Peter Drucker is quoted as saying, “What gets measured, gets managed.” Use key process indicators (KPIs) to find out where your accounts receivable management stands and monitor them to ensure you’re improving your AR management over time. A few accounts receivable management KPIs to use include:
Days Sales Outstanding (DSO)
Also known as “accounts receivable days,” DSO is a measure of how quickly your clients are paying their invoices. Naturally, the lower your DSO is, the better.
DSO = (Accounts Receivable / Total Invoiced Sales) x Number of Days
Average Days Delinquent (ADD)
Your ADD tells you the average number of days after an invoice is due that it takes clients to pay. It helps you identify if bad debt is becoming a problem for your business.
To calculate ADD, you’ll first need to calculate DSO as above and then calculate your best possible DSO.
Best Possible DSO = (Current AR / Billed Revenue) x Days
Next, you can calculate ADD.
ADD = Days Sales Outstanding – Best Possible Days Sales Outstanding
Accounts Receivable Turnover Ratio (ART)
ART measures how effective your company is at collecting receivables.
ART = Net Invoice Sales / Average Accounts Receivable
Collection Effectiveness Index (CEI)
CEI is a s a measure of your ability to turn invoices into cash during a given time period. The closer you are to 100 percent, the better.
First, calculate the Amount Collected.
Amount Collected = Beginning Receivables + Invoice Sales – Ending Receivables
Next, calculate the Amount Available for Collection.
Amount Available for Collection = Beginning Receivables + Invoice Sales – Ending Current Receivables
Then, use these figures to calculate CEI.
CEI = (The Amount Collected / The Amount Available for Collection) x 100
There’s no detailed formula for revised invoices. You’ll simply need to track the monthly invoices you edit. A high number of revised invoices or an upward shift is usually a warning sign that something’s wrong with your invoicing processes, such as system or human errors.
Should You Outsource Your AR Management?
If you don’t have the bandwidth to handle accounts receivable management effectively or your KPIs consistently point to trouble, it makes sense to outsource. Many businesses outsource AR management to save money or provide better customer service too.
Accelerate Payment with Invoice Factoring from Viva
There are lots of receivable solutions depending on what your business is struggling with. If you typically have strong accounts receivable management, but occasionally have cash flow issues due to slow-paying clients or rapid growth, invoice factoring may be a better solution than total outsourcing.
A factoring company can help you by providing credit checks, so you set client relationships up for success from the start. From there, you can choose which invoices to submit to the factoring company and when to factor them. The factoring company then sends you most of the invoice’s value right away and waits for payment from your client. When the client pays, the factoring company sends you any remaining funds minus a nominal factoring fee.
If invoice factoring sounds like the ideal solution for your needs, request a free rate quote from Viva.
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