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What is Accounts Receivable Management? 7 Tips to Improve AR

10 June, 2022
3 min read
Rachelle Fisher, AVP, Digital Transformation
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What you'll learn

  • How to manage accounts receivables?
  • Which pitfalls to avoid for better collections
  • How to make changes to your operations to improve AR?
  • Benefits of improved accounts receivable management
What is accounts receivable management?
What are the goals of accounts receivable management?
What are the common issues that affect accounts receivable management?
7 effective accounts receivable management techniques
How HighRadius can help you manage your accounts receivables?
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We all know that the accounts receivable (AR) process is an integral part of all sales transactions which are credit-based. Managing accounts receivable is vital to ensure that invoices are sent and the payments are collected once the goods or services are delivered. But that’s not all.

What is accounts receivable management?

The process of managing the complete process from order to cash, which includes credit onboarding, invoicing, collection, cash reconciliation, and deduction management is called AR management. 

Accounts receivable management starts as soon as the sale is finalized because that is the time the AR team steps in to assess the customer and onboard them for credit transactions. However, the process of AR management continues throughout the lifecycle of a B2B customer. The various stages include credit assessment and onboarding, invoicing, reconciliation, deduction management, and more.

Proper accounts receivables management will ensure that your cash flow is healthy, the team is happier, customers are satisfied, and expenses are low. However, managing accounts receivables is not easy and needs careful planning and resource allocation.

What are the goals of accounts receivable management?

The way you manage accounts receivables affects many areas of the business. These include:

Cash flow management

The rate at which you are able to collect receivables from your customers has a direct impact on your cash flow. When receivables become slow, your cash flow is affected adversely.

Customer relations

Your accounts receivables management has a direct impact on the way customers view you. For instance, if your AR team keeps contacting a customer even after payment is made, it is bound to irritate them. Or if you expect payments from customers without sending invoices to them on time, this can become a negative factor too.

Bank reconciliation

Often much of your AR team’s time is spent on sorting through the payments received and applying them to the relevant accounts. In the absence of a proper system to do this, it can be a time-consuming and erroneous process.

Market reputation

When your team is unable to manage your cash flow, support good customer interactions, and spend much of their time on cash application, it is bound to have a domino effect. With poor cash flow, you will be unable to pay your suppliers and this affects your ability to deliver goods or services as provided, which can damage your reputation.

What are the common issues that affect accounts receivable management?

Some of the common issues that affect accounts receivable include:

  • The disparity between the sales and finance departments’ goals. With the sales team’s goal of increasing sales and the finance team’s aim to reduce bad debts, conflicts will arise. The sales team may promise credit terms to customers, which the finance department may not agree with
  • Numerous gaps in the process, which require tedious manual efforts. When you do not automate your accounts receivable processes, then the team is bound to spend the majority of their time on manual efforts in all aspects, which will result in poor AR management
  • The lack of unified data and information silos hinders collaboration. When you do not have access to data in real-time, then your business can face lack of collaboration between customer-facing teams including sales, collections, and others
  • No mechanism to use empirical data to predict negative outcomes. When you do not have access to historical data, it becomes impossible to predict when an account can go bad and this can cause major losses when the customer is unable to pay
  • Continuity issues due to changes in internal and external teams. Credit transactions require constant documentation (invoicing) and payment streams. When your accounts receivable management is not streamlined, you will see breakage in the invoicing-collections-payment-cash application processes

7 effective accounts receivable management techniques

There are many aspects to accounts receivable management, which include credit onboarding, invoicing, collection, reconciliation, and dispute resolution. The tips given below will cover a single aspect or more than one.

The right time and tone

When it comes to invoicing, there are two aspects that you need to get right. One is to ensure that the invoice goes out on time and as per the agreed terms of payment. When you have a cadence for invoice delivery, the customer will start anticipating it and make arrangements to pay on time.

Another aspect that you need to get right is the tone of your communication when you send the invoices over to the customer for payment. Make sure that your invoice is not cluttered but contains all the details. The email content accompanying the invoice needs to be clear and concise while remaining polite.

Robust post-sales setup

You will find that many of the deficiencies in the collection occur because the customer is not happy with aspects of the post-sales support. While this tip does not completely apply only to your finance department but to all customer-facing teams, it is critical to ensure that your post-sales setup is robust. As part of the finance team, you can ensure that all the documentation related to the sale (before, during, and after) is sent to the customer on time. Post the sale, you can also ensure that the invoicing process is streamlined with attention to detail.

AR automation

Businesses worldwide have started seeing value in digital transformation in critical processes. One of the processes that will definitely benefit from automation is accounts receivable. When you automate your accounts receivable, the process becomes quicker and leaves no room for manual errors. Accounts receivable automation keeps track of invoicing, collections, and patterns to look out for, but it also ensures that your employees can focus on more strategic work.

Clear internal processes

Often the root cause of your collections and cash flow issues is simply a matter of poor internal processes. One of the easiest ways to mitigate the constant issues that the sales department and the AR team have is to make clear internal processes. Make sure that each of the teams understands the end objective of the other. Sales will focus on getting orders and the finance team will ensure that the customer is financially sound enough to warrant credit term. However, it is equally critical for each of the teams to support the other in these processes.

Two-way communication

Whether it is internally or externally, one of the crucial tips is to follow is to ensure two-way communication. This may seem like an obvious factor, but it is often ignored, especially when it comes to the finance team and customers. Enable easy-to-use and numerous options for stakeholders—both internal and external to interact in the way they choose to.

More payment options

One of the ways to ensure efficient accounts receivable management is by enabling your customers with many options to pay. Doing this will ensure that your customer can make payments even if the authorized person is traveling. Often customers will balk at making the payment because they have to move away from what they are doing to the option provided. But by enabling more options, you are making it convenient for your customer to pick the option that works for them at that point in time.

Quality all the way

In B2B business transactions, especially ones that involve delayed payments, quality can become an issue. By quality, we mean not only the quality of goods or services delivered but also the quality of interactions that customers have with your organization at all touchpoints. Make quality a priority at all levels, whether it is on the shopfloor, transportation, inventory management, or the finance department.

How HighRadius can help you manage your accounts receivables?

At HighRadius, our team of fintech experts works with different businesses to understand their specific needs and offer solutions that will help you manage AR with ease. Our solutions cover all aspects of accounts receivable management, which includes credit assessment and onboarding, invoicing and collections, cash reconciliation, and deductions management.

What is more our solutions also offer insights into customer behavior to anticipate and resolve problems before they become bigger. Our portfolio of accounts receivable software includes solutions for companies of all sizes.

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