Receivables management can pose a range of challenges for businesses. Common pain points include late payments from customers, which disrupt cash flow and often involve time-consuming follow-ups and manual, repetitive debtor management tasks which many businesses lack the time and resources to complete.
Receivables management services are a range of financial services designed to help businesses improve the efficiency and effectiveness of their accounts receivable processes, typically by outsourcing their accounts receivables management to a third party.
These services can include tasks such as invoicing, payment processing, credit control, and debt collection.
Internal vs. outsourced receivables management
Businesses have the choice to manage receivables internally or outsource to third-party providers. Internal management offers control over processes, familiarity, and potential cost savings, but it can be time-consuming, requires expertise, and may strain limited resources.
Outsourcing, on the other hand, frees up resources, provides specialized expertise, efficiency, and scalability, but it can lead to a loss of control, potentially higher costs, and communication challenges. To make the best decision, companies should carefully assess their needs, resources, and objectives.
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Receivables management services: Key takeaways
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Why do businesses use receivables management services?
Businesses use receivables management services to improve the efficiency and effectiveness of their accounts receivable processes. These services can help businesses:
- Improve cash flow and faster collections: By streamlining invoicing, payment processing, and debt collection, businesses can reduce the time it takes to collect payments from customers, improving cash flow and working capital.
- Reduce administrative burden on internal teams: Outsourcing receivables management tasks can free up internal staff to focus on other core business functions, reducing administrative costs and improving productivity.
- Access to specialized expertise and technology: Receivables management providers have the expertise and technology to handle complex receivables issues, such as credit control and debt collection. This can help businesses improve their overall collections performance.
- Improved cash flow and faster collections: Outsourcing providers often have a proven track record of improving cash flow and reducing DSO (days sales outstanding).
- Cost-effectiveness: Outsourcing receivables management can be a more cost-effective solution than building and maintaining an internal team.
What are the downsides of outsourcing receivables management?
While outsourcing receivables management can offer several benefits, there are also potential downsides to consider:
Costs
Outsourcing a function of your business will come at a cost, so consider opting for a provider that offers up-front, transparent pricing to avoid receivables management services costs eating into your profitability.
Customer relationships
Outsourcing receivables management can damage customer relationships if the service provider uses aggressive collection tactics. This can lead to customer dissatisfaction and lost business. When seeking a receivables services provider, ensure you choose a provider that aligns with your brand, and does not use tactics that may negatively impact your reputation or customer relationships.
Loss of control
When outsourcing receivables management, companies lose direct control over the collections process and communication with customers around invoices and payments. This can make it difficult to maintain a consistent customer experience and ensure that collections are handled in a professional and ethical manner. So when selecting a provider, ensure you opt for one that will act as an extension to your existing finance team, and will help you ensure a seamless, positive customer experience for your debtors.
Compliance risks
Outsourcing providers must adhere to various legal and regulatory requirements. If the service provider fails to comply with these regulations, the company could face legal and financial penalties. It's essential that you do your due diligence when selecting a receivables management services provider and ensure they meet legal requirements. A trustworthy provider should be forthcoming with this information.
What are the pros and cons of managing receivables internally?
The other option for managing receivables is to use an internal accounts receivable team, but this comes with its own list of pros and cons to consider:
Pros:
- Build customer relationships: A company can maintain a more personalized approach and direct connection with its customers when managing receivables internally. This can lead to stronger relationships and improved customer satisfaction.
- Full control: Internal management of receivables provides a company with complete oversight of the collections process. This can allow for greater flexibility in adapting strategies and making decisions.
- Cost savings: By managing receivables internally, a company can avoid paying fees to third-party providers. However, it is important to factor-in the salary-time cost of your team members who will be taking care of receivables management instead, and work out what would be most cost-effective for your business.
Cons:
- Resource intensive: Managing receivables internally requires dedicated personnel, training, and technology investments. This can strain a company's resources and divert attention from other strategic business tasks.
- Time-consuming: The day-to-day tasks of managing receivables, such as invoicing, payment processing, and debt collection, can be time-consuming and tedious. This can take away from time that could be spent on more strategic business activities.
- Scaling challenges: As a company grows, the task of managing receivables internally can become increasingly difficult. This is because the volume of invoices, payments, and collections will likely increase, requiring additional resources and infrastructure.
Internal vs. outsourced receivables management: which is right for your business?
When it comes to managing accounts receivable, businesses have two main options: internal management or outsourcing to a third-party provider.
Both approaches have their own advantages and disadvantages, and the best choice for a particular business will depend on its specific needs and resources.
Assess business needs:
- Consider the size of your company. A larger company with a high volume of invoices may benefit more from outsourcing than a smaller company with a low volume of invoices. However, a smaller company with no internal resources to manage credit control may also benefit significantly from having a service provider manage this for them - without having to hire a full-time employee.
- Identify your industry. Some industries, such as healthcare and manufacturing, have specific invoice processing requirements that may be better handled by a dedicated outsourcing provider.
- Determine your invoice volume. The number of invoices you process each month or year will impact the cost and efficiency of outsourcing.
Evaluate costs:
- Compare the costs of outsourcing invoice processing to the costs of building an internal team. Consider factors such as salaries, benefits, training, and technology costs.
- Evaluate the potential cost savings of outsourcing. Outsourcing can help you save money on labor costs, technology investments, and overhead expenses.
- Assess the risks and rewards of outsourcing. While outsourcing can save you money, it also introduces some risks, such as data security breaches and vendor management issues if you select the wrong provider.
Impact on customer experience:
- Weigh the importance of direct client communication. If you have a strong relationship with your clients and value direct communication, you may want to keep invoice processing in-house, or take extra care to opt for an outsourcing provider that aligns closely with your brand.
- Evaluate the potential benefits of outsourcing on customer experience. Outsourcing can help you improve customer service by providing access to specialized expertise and technology.
Scalability and flexibility:
- Consider which option allows for easier scaling as the business grows. Outsourcing can be a more scalable option than building an internal team, as you can easily add or remove capacity as needed.
- Evaluate the flexibility of each option. Outsourcing can provide you with more flexibility to adapt to changing business needs, such as seasonal fluctuations in invoice volume.
- Assess the potential risks and rewards of outsourcing. While outsourcing can provide you with scalability and flexibility, it also introduces some risks, such as vendor lock-in and potential disruption of service.
Best practices for internal receivables management
If you do choose to invest in internal receivables management, here are some best practices to get the best out of your accounts receivable team:
Invest in technology
To automate and streamline invoicing and accounts receivable (AR) processes, implement invoicing and AR software. This software should integrate with your accounting system and other business applications to eliminate manual data entry and reduce errors. Automate invoice creation, sending, tracking, AR follow-ups, and collections. Use cloud-based software to access your AR system from anywhere, anytime.
Set clear payment terms
To prevent misunderstandings, businesses should clearly communicate payment terms on invoices. This includes specifying the due date, payment amount, and accepted payment methods.
Early payment discounts and late payment fees should also be included. Additionally, payment terms should be consistent across all invoices and contracts to ensure clarity and consistency for customers.
Automate reminders and follow-ups
Automate payment reminders before the due date through email or text. Personalize templates to remind customers about unpaid invoices, including a payment link or instructions. Follow up with personalized calls or emails for late payers.
Does your business need receivables management services?
Businesses often face a dilemma when it comes to managing accounts receivable: should they handle it internally or outsource to a third-party provider?
Both options have their advantages and disadvantages, and the best choice depends on the specific needs and resources of the business.
Companies deciding between internal and outsourced receivables management should carefully evaluate their specific needs and consider the pros and cons of both internal and outsourced receivables management as discussed in this article. With the right approach, businesses may be able to manage receivables in-house or use an external expert to complement their efforts.
Consulting with a financial advisor or exploring cutting edge software solutions like Chaser that can support in-house receivables management can be helpful in making an informed decision.
For more information on how Chaser can help your business with both automated internal receivables management or expert outsourced receivables management, book a call with an expert today.
