It's not a secret that managing accounts receivables is one of the most important aspects for any company, especially in today's business environment.
What should you focus on to make your accounts receivable management work? What are some best practices? In this article, we will discuss how to improve your accounts receivables management and reduce the risk of generating bad debt.
What is accounts receivables management?
Accounts receivable management (ARM) refers to a range of activities that businesses use to ensure they receive payments for the products and services they provide on time.
It is important to set up accounts receivable management in your business for the following reasons:
- Ensuring you always get paid on time, minimizing bad debts (receivables), reducing days sales outstanding (DSO) and maximizing cash flow.
- Avoiding late payment penalties imposed by suppliers or customers.
- Maximizing working capital, which can improve financial performance through faster collection of revenue and reduced investment tied up in slow-paying invoices.
When it comes to managing accounts receivable, it is important to remember that this process is not just about collecting payments from customers. It is also about maintaining a good relationship with your clients, ensuring that they always have trust in your company.
There are two main aspects of accounts receivable management: the first one is creating and implementing an effective policy, and the second one is following up on invoices regularly.
Outside of these two key pillars, there are also accounts receivable best practices that will increase your chances of success in collecting debts from your customers.
What are the benefits of managing this part of a business?
If you're not trained in accounting, finance, or credit control, it can be easy to underestimate the importance of managing accounts receivable. What's more, managing accounts receivable is a time-consuming activity that requires effort and hard work.
However, if you manage your business finances well from the very beginning (and this includes setting up an effective accounts receivables policy), it will save you both money and stress in the long run.
In addition to making sure customers pay on time and without fail, good accounts receivables management also helps businesses:
- Prevent profit loss by minimizing bad debts
- Avoid late payment penalties charged by suppliers
- Reduce collection costs through early debt recovery processes such as sending out reminders or invoices for overdue amounts
- Increase customer satisfaction with quick invoice processing times
It's important to note that these benefits can be achieved by any business, regardless of size or industry, and we'll be giving you some easy-to-implement tips on how to manage your accounts receivable.
1. Have an effective accounts receivables policy in place
The key to having successful accounts receivable management is to have a well-defined policy in place. This policy should include all the necessary details about how you expect your clients to pay their invoices, as well as what will happen if they don't comply.
A well-defined and effectively communicated accounts receivable - or credit control - policy is essential for any business looking to improve its cash flow.
This policy should cover areas such as credit limits, invoicing procedures, debt collection methods, and dispute resolution processes. By having a written policy in place, your team will be aware of what is expected of them when it comes to managing debtors and collections.
Your accounts receivable policy should also include a late payment fee schedule. This will let your clients know exactly how much they'll be charged if they don't pay their invoice on time, and it can help to motivate them to pay up quickly.
It's also important that you make your customers aware of your accounts receivables policy during the onboarding process and make sure that they explicitly agree to your payment terms and state that in writing. This will give you more leverage if they later claim to be unaware of your payment terms.
2. Don’t wait till your invoices are overdue
One of the worst things you can do is wait until an invoice is overdue before taking action. By that point, it may already be too late to collect the money owed to you.
It's important to be proactive about accounts receivable management, and reach out to clients early on if there are any signs that they may not be able to pay their bill on time. This will give you more options for collections, such as repayment plans or debt recovery services.
It's also important that you are organized and data-led in your approach to tracking debtors effectively and responding to late payments quickly. This will help you to identify any potential problems early on and take steps to mitigate the impact on your business.
Remember, you don't have to wait until an invoice has become overdue in order to start chasing payment. You can always send a polite before due payment reminder to your customers to encourage prompt repayment whilst protecting your relationships
The sooner you start chasing payments, the more likely you are to receive them in full and on time.
It's important to be proactive when it comes to debt collection, as opposed to reactive. This means setting strict credit limits for your customers and actively pursuing payments even before they're overdue.
If you wait until an invoice is overdue, you'll likely face increased costs and a longer payment timeline. In some cases, you may even need to resort to debt recovery services in order to get the money you're owed.
3. Be persistent
It can be frustrating when you're trying to collect money from a client, and they keep putting you off or making excuses. However, it's important to be persistent and continue reaching out until you've received payment. Sometimes it takes multiple attempts before a client finally agrees to pay up.
In order for accounts receivable management to be effective, it's essential that you remain persistent with your debtors. This means continually chasing payments until they are made in full.
The first step is to establish a process for chasing invoices. What you do will depend on the type of business that you have, but if your accounts receivable management is effective it shouldn't be too difficult to get paid by clients.
From there, you'll need to set out a schedule to send reminders. That schedule will be unique to your business, but you can use the one below as a general guide:
- Before you send an invoice: Find out who to call in order to understand the procession of your invoice.
- Send an electronic invoice as soon as the work is completed.
- Email the customer with a polite 'before due' reminder one week before the expiry of your stated payment window.
- First reminder: One day after the invoice has become overdue.
- Second reminder: One week after the invoice has become overdue and on a weekly basis after this.
- Final notice: Four weeks after the invoice was sent
If payment hasn't been received by this stage, then it's time to get tough. You can start by calling your client on the phone and following up those phone calls with an email.
After four weeks, you might want to send a follow-up letter that reinforces the penalty for non-payment. You can also consider turning the matter over to debt collectors. There are some great services out there, like Chaser, who will do all the hard work for you!
4. Set strict credit limits
Credit limits are an important part of accounts receivable management. By setting credit limits for your clients, you can help reduce the risk of overdue payments.
A well-researched set of credit limits is the first line of defense protecting your business from bad actors and delinquent customers.
The downside to setting credit limits is that you may lose some business in the short term from clients who can no longer afford your services. But, as with all things, there is a balancing act at play and it’s important to find the right limit for each client.
Remember, credit limits should also stay fluid and should change in reaction to the credit checks you should be performing on your customers on a regular basis.
5. Be prepared for excuses
When it comes to extracting payment from your customers, you will run into some excuses for non-payment. You may hear:
“We have not been paid yet.”
“We didn't receive the invoice”
"Your payment terms weren't clear"
"The person who deals with the invoices isn't available"
In most cases, it is important to be persistent and politely remind your customer of the urgency in making payment as soon as possible.
Issues with contacting a specific person can be overcome by building a relationship with the person who greenlights the payment of invoices.
If you have a clear set of payment terms and get your customers to agree to them during the sale, it can be more difficult for them to make excuses.
In some cases, you can offer a small discount for paying immediately or agree on an alternative method of repayment such as monthly installments if that will help them pay sooner rather than later.
6. Set KPIs
KPIs, or key performance indicators, are a great way to measure the success of your accounts receivable management.
Some KPIs you may want to track include:
- Days sales outstanding (DSO)
- The percentage of invoices paid within 30 days or less
- The percentage of invoices paid more than 30 days late
- The average amount of time it takes to collect an invoice
- Invoicing accuracy
Having these KPIs in place is important because it allows you to monitor how effective your credit control or accounts receivables processes are and how much impact any changes you make have on that efficiency.
If you find that your DSO is increasing, for example, it may be time to look at tightening up credit limits or being more persistent in chasing payments, for example.
Of course, the better your accounts receivable management is, the less time you will need to spend on it and that means more time available to focus on getting new customers!
7. Use debt recovery services where necessary
There may come a time when you need to enlist the help of a debt recovery service. This is usually the last resort, but if you have tried all of the other tips in this article and still haven’t managed to get your money back, then it may be time to call in the professionals.
The first step in choosing a debt recovery specialist is to do your research. There are many companies out there, so you need to find one that is reputable and has a good track record.
Once you have found a few companies that meet your criteria, it’s time to start comparing them.
Make sure you ask questions such as:
- What services do they offer?
- What is the average recovery rate?
- How much will it cost?
- How will the debt collectors at this agency impact our customer relationships?
- What is the process for recovering the debt?
By asking these questions, you can make an informed decision about which company is best for you.
We all know how vital building great relationships with your customers is and this is why it’s important to communicate with them and resolve any issues before they escalate.
However, if you do need to use debt collectors, you'll want to ensure you opt for a reliable, friendly debt recovery provider that won’t damage your reputation or client relationships.
Chaser's debt collections team uses mediation and polite persistence instead of harassment and aggression to recover the debt, so you can be sure that your customers won’t receive any nasty surprises.
Make your accounts receivable work for you
Now that we’ve looked at some of the best practices for accounts receivable management, it’s time to put them into action!
Implementing even a few of these tips and accounts receivable best practices will help you get your accounts in order and improve your cash flow.
Managing accounts receivable doesn't have to be hard work, especially with help from Chaser.
