Accounts receivables (AR) management has a single goal: to protect cash flow. Accounts receivables come from sales made to customers on credit. Effective AR management ensures that this process goes smoothly.
Many companies depend on accounts receivable workflow tools to help cover weak spots in their AR management. In addition to good AR management software, a business should also have a strong accounts receivable process that covers all the bases.
Inefficient workflows
Order to cash processes affects how long it will take a customer to pay for goods and services. If an invoice never goes out, payment will never be received. Billing happens right after an order is placed and delivered. Any breaks in this handoff can affect the accuracy of an invoice. Some customers require documentation with bills, such as proof of delivery or a purchase order number.
Missing these vital pieces of data can delay orders and cause invoices to be late. AR automation tools work well in environments where volume is high. Automating ordering and billing with accounts receivable software (https://www.bill.com/product/accounts-receivable) reduces errors and ensures customers receive their invoices on time.
Set credit & collection policies
The first thing that should be done with an accounts receivables process (also called order-to-cash) is to document a workflow that ensures sales on credit are billed, paid, and applied. Credit and collections policies include several components such as:
- Credit Evaluation
- Order and Billing
- Aging Management (collections)
- Cash Applications
An accounts receivables process should thoroughly address all of these. These processes should have accounting controls in place, which ensure their efficiency. Your AR process should address who performs an action, how it is completed, and how it is audited for accuracy. Revisit this process periodically for efficiency and results.
Disorganized accounts receivable data
When you bill invoices on credit terms, they create an aging of accounts. An aging of accounts data shows your customer accounts, how much they owe, and the age of the balance. If you are not monitoring this data, you risk increasing bad debt. Bad debt is when an invoice cannot be collected or paid.
Stay ahead of bad debts by monitoring the unpaid invoices in your system. You can manage accounts receivable data with simple computer tools like spreadsheets, and some require AR software that makes it easier to identify your collection risks.
Manage collections manually
Managing collections by yourself may cause you to overlook accounts, invoices to remain unpaid, and missed opportunities to discover misapplied cash receipts. With workflow automation, collections are streamlined, and the funds that require the most attention are prioritized. Accounts receivable software gives you dashboards that show a high-level overview of the state of your AR.
Manual collections management also causes you to miss opportunities to notify customers of past due billing or other collections correspondences. Manual collections often depend on a collector making active calls. A workflow solution can automate email notifications to past due costumes and prompt them to call you. This form of collections management prevents wasted productivity.
Cash applications
The cash applications step in the AR cycle directly impacts your cash flow. It can become a barrier to effective AR processes without proper management. When money is received, it has no value in your accounting system until it’s applied to an invoice. When the cash has been deposited and used, it reduces your accounts receivable and increases your cash account.
Cash applications are also better managed with accounts receivable software. A sophisticated system quickly helps you highlight errors. AR software also allows you to put accounting controls in place to ensure cash applications follow accounting rules.
Customer experience
Customer experience is often an overlooked barrier to the AR process. A customer has an experience with every step of the AR process, from the order to the final confirmation of a paid invoice. One key barrier is how customers receive and pay their invoices. Give customers convenient ways to view and pay their invoices, such as online access or wire transfer.
Accounts receivable software has built-in payment tools that allow your customers to pay your invoices once they’ve viewed them. Without these conveniences, a customer has to wait for an AR clerk to call them back to take payment; it prolongs the AR cycle and leaves an invoice open longer than it has to be.
Bad debt management
Bad debt management, also known as “allowance for doubtful accounts,” is a crucial part of AR process management that mitigates the risk of uncollected invoices. An effective process involves AR managers who thoroughly and often review AR aging reports to identify payment trends. The credit evaluation process is also a crucial part of bad debt management.
You should do a credit analysis on all new and existing customers and verify their ability to pay. Credit analysis also helps you identify how much credit to offer a customer. Bad debt management is also controlled by implementing credit limits and credit holds on customer accounts. Customers who do not pay timely can see their buying privilege suspended until they make payment. AR software can automate these controls.
Staffing
A accounts receivable management process is not good if the players who carry it out are not qualified and lack the skills to manage the AR department. Your accounting clerks should have the specialized accounting experience to manage components of the AR cycle.
Collections roles require skills like customer service, negotiation, resourcefulness, and account management. Cash applications require basic accounting knowledge, attention to detail, and follow-through skills. AR data analysis requires auditing, analytical, and technical skills.
Wrap up
A good AR team is cohesive with team members who contribute various specialized skills. Although skills are essential, AR automation tools help you get the best productivity and will acknowledge any issues quicker.
Accounts receivable software increases productivity and gives your AR staff time to focus on things that impact reducing AR balances and prevent a backlog of customer orders and unpaid invoices, which can be crucial for a business to stay reputable.