Late payments cost business in the UK £1.6 billion per year and the crushing financial pressure shows no sign of letting up. Data collected by Xero shows that the cost of unpaid invoices has doubled in the last two years alone. The average payment delay is also 6.1 days past the deadline, more than double what it was in 2021.
One of the best solutions to these rising late payment costs is effective and streamlined accounts receivable (AR) management. Putting an efficient and holistic AR management system in place reduces payment times, prevents bad debt, and minimises the chance of common payment roadblocks such as disputes and errors.
This comprehensive guide will highlight the common AR management problems found in businesses of all scales and provide simple solutions to help you overcome the current late payment crisis.
Late payments
The first and most impactful of the issues commonly found in inefficient AR processes is consistent late payment. Doing nothing to solve late payment issues results in 50,000 businesses going bankrupt every year, so the stakes could not be higher.
Late payments have a significant impact on your business’s cash flow. The resulting drop in liquidy stifles growth, reduces your ability to grasp opportunities, and can drive you into further debt.
Common causes of late invoice payments
Two of the most common causes for late payments include:
- Inefficient invoicing - Invoices that are sent late, incomplete, or with errors in the details slow the entire payment process down. More work hours then need to be spent fixing these issues, increasing the total cost of late payment.
- Lack of reminders - A consistent schedule of payment reminders is critical to getting your invoices paid on time. Assuming your invoice will make it to the correct person and will get paid without a well placed reminder ignores the fact that 87% of businesses are consistently paid late.
Solutions to late payments
There are several easy-to-implement solutions that can help your business avoid being one of the 50,000 businesses going bankrupt every year.
- Automated invoicing - Automation is a critical part of a streamlined and effective AR management system. Employing an automated invoicing system ensures that invoices are sent on time while also reducing human error. Sending an accurate and timely invoice is the best way to get paid and automated invoicing allows AR teams to do so without adding to their workload.
- Regular reminders - There are a huge range of reasons why your invoice might be going ignored and while you’re waiting to get paid, your cash flow is suffering. Automated reminder systems take most of the work out of chasing your invoices, allowing you to send regular polite reminders that keep your invoice at the top of the pile.
- Clear payment terms - Your payment terms are the foundation of your AR process. They let your customers know when and how they should pay and what the consequences of non-payment are. Having unclear, or worse, no payment terms muddies the waters, leading to inconsistencies, errors and delays.
Disputed invoices
Errors in your invoices lead to disputes. Disputes with your customers impact your carefully cultivated relationship, while also leading to more payment delays.
Ensuring basic accuracy and timeliness in your invoicing can solve both of these problems, reducing payment delays and helping to promote repeat business by enhancing your customer relationships.
Common causes of invoice disputes
The most common causes of disputed invoices are:
- Human error - While some human error is to be expected in business, smaller or overworked teams can often lead to compounding errors in your AR processes. These errors lead to delays, disputes, and further losses.
- Unclear terms - Clear payment terms ensure you and your customers are always on the same page when it comes to payment details and timelines. Unclear payment terms lead to misunderstandings and miscommunications and, at worst, can sour your relationship with a potentially valuable customer.
Solutions to prevent invoice disputes
Thankfully, there are some very easy to adopt solutions that can prevent errors from creeping into your AR processes and causing disputes.
- Accurate invoicing - Accuracy in your invoicing is critical. All invoices should, at least, be double checked before sending. Automated invoicing systems can help to reduce human error and increase accuracy while not negatively impacting your AR team’s workload.
- Clear communication - Implement transparent payment terms and clear communication to prevent disputes from ever happening. If you and your customer both understand a clear set of payment terms, then any minor errors can be caught and rectified easily with the minimum of misunderstandings.
- An effective dispute resolution process - Not only does a robust dispute resolution process help to quickly resolve issues, but it can also help to build a positive relationship with your customers. Just having a dispute resolution process in place demonstrates to your customers that you take any issues they raise seriously and will work with them to resolve any disputes.
Inefficient accounts receivables processes
All systems are vulnerable to creeping inefficiencies. Without regular review, your AR processes will gradually become less efficient and more time consuming, leading to costly errors and higher spend but reduced results.
Monitoring, reviewing and revising your systems when inefficiencies start to appear can reduce errors, eliminate delays and ensure your cash flow remains healthy.
Common causes of inefficient receivables processes
The most commonly reported causes of inefficient accounts receivables processes include:
- Outdated systems - Outdated legacy systems are a common culprit when it comes to inefficient accounts receivables processes. Many companies and teams are slow or reluctant to embrace new systems or technologies due to a bias towards systems they already understand.
- Lack of automation - Automated systems can’t replace skilled workers, but they can reduce the number of repetitive tasks they have to perform, freeing them up to apply their skills in more productive ways.
The solution: how to make your receivables process more efficient
As AR technology advances, businesses can choose from a wide range of AR systems to make their accounts receivable processes more efficient.
- Modern AR software - Regularly update or replace legacy systems to make your AR system more efficient while allowing you to take advantage of the features and benefits newer software offers.
- Staff training - Provide effective and supportive training to make staff more comfortable with new systems and adapt to more efficient ways of working. Confident and well trained staff are better empowered to work to the best of their abilities.
- Process reviews - Regular process audits can help to expose and solve errors and inefficiencies, while highlighting areas for improvement that can further reduce payment delays.
Poor credit management
On average, companies in the UK write off £5.8bn in bad debt every year, with one in 10 scrapping bills worth more than £100,000. For some, unrecoverable debt is responsible for driving them into insolvency.
Effective credit management mitigates the risk of bad debt while providing you with a wider range of opportunities to recover outstanding payments.
Common causes of poor credit management
Some of the most common causes of substandard credit management are:
- Inadequate credit checks - Limited or non-existent credit checking is surprisingly common, with most companies only credit checking customers during the onboarding process, if at all.
- Inconsistent terms - Without obvious guidelines on when and who to offer credit to, businesses can find themselves offering lines of credit to customers who have a history of not making payments. Even with credit-worthy customers, inconsistent terms can lead to misunderstandings, delays and disputes.
The solution: how to improve your credit management
Mitigating risk is essential to ensuring consistent cash flow and the overall safety of your business. Thankfully, there are several steps you can take to enhance your credit management processes:
- Thorough credit checks - Credit checking during on boarding and at regular intervals during your business's relationship with a customer is the best way to ensure you don’t accrue bad debt.
- Monitor client behavior - Monitor your client’s payment behavior and how it changes over time, as this allows you to adapt to their changing creditworthiness and minimize risk.
- A comprehensive credit policy - Put in place a comprehensive credit policy to ensure your staff fully understand when to offer credit. It also means your customers know under what circumstances they’ll be offered credit and why that might change.
Lack of communication with debtors
Open communication is the bedrock of a productive customer relationship. Failing to communicate effectively with your customers can lead to disputes or worsen an existing situation.
Without clear communication, it becomes significantly harder to resolve any payment disputes and keep your customers happy while ensuring cash flow.
Common causes of lack of debtor communication
Some of the most common causes of poor communication include:
- Infrequent follow-ups - Follow ups include everything from chasing a late invoice to responding with a thank you when payment is made. Neglecting your follows up can lead to forgotten and late payments while denying you the opportunity to build on your customer relationships.
- Unclear instructions - Unclear or contradictory payment instructions slow the entire payment process down and can frustrate your customers.
The solution: how to improve debtor communications
Improving your communications with your client is as easy as taking the following steps:
- Regular communication - Maintain regular contact with your customer to give them a channel through which they can ask questions or clarify issues. Consistent communication is the best way to head off any potential disputes.
- Client education - Give your customers everything they need to understand and adhere to your payment processes to maximize your chances of getting paid on time while demonstrating that you also value your customer’s time.
Prevent common accounts receivables problems with AI and automation
Chaser’s comprehensive suite of automation options give you all the tools you need to streamline and enhance your AR processes. From error-free automated invoice to consistent, multi-channel automated reminders, Chaser frees your AR staff up from repetitive tasks and lets them apply their skills to something more productive.
With Chaser, you can monitor your client’s payment behavior and use Chaser’s integrated credit checking facility to determine credit-worthiness and reduce the risk of bad debt. Chaser’s AI-powered late payment predictor and recommended chasing times give you the tools you need to anticipate late payments and ensure your reminders arrive at exactly the right time.
By using a combination of AI and automation features, Chaser helps you chase and collect payments in the fastest, friendliest way possible.
Streamline your AR system to improve your cash flow
While AR problems such as invoice errors, unclear payment terms, a lack of follow ups, and spotty credit checking are both common and can lead to insolvency, fixing your AR system isn’t as hard as it sounds.
By implementing the solutions above you’ll be able to eliminate costly errors and delays from your AR management system, ensuring greater liquidity and avoiding bad debt.
For more expert tips and advice from financial professionals, as well as a range of accounts receivable resources, check out the other articles on the Chaser blog and news page.
To automate and streamline your accounts receivables process and start eliminating problems today, try Chaser for free, or speak to an expert.