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Clocking ROI in Receivables Payments: Traditional vs Modern AR Practice

What you’ll learn

  • Learn how to make faster accounts receivables collections to achieve a high ROI.
  • Explore the ways on how to use digital transformation in various steps of cash application and ar collections.

The entire order-to-cash (O2C) process is more complicated than it looks. Many presume that the complexity is limited to placing the orders and delivering them. But the real trouble comes when you have to collect the payments. The receivables collection process is a challenge for a majority of the small and mid-sized businesses (SMBs). Even if you have vetted your customers well and delivered the invoice correctly, there is no guarantee that the money will flow in smoothly without any hiccups. When the AR process doesn’t go as planned, finance executives get concerned about outstanding receivables. Collecting these overdue payments require additional resources It also leads to higher operational expenses and increases the time-to-cash, thus affecting your ROI.
80% SMB owners fell pressurized

Sources: PYMNTS

Let’s first look at the traditional accounts receivables management methods and how they stop you from achieving a higher ROI.

Traditional Receivables Collection Practices at a Glance

Traditional receivables collection management relies on manual methods to handle the tasks, such as sending correspondences, collecting payments, matching the invoices, and handling disputes. These practices work when you have a small customer base and small-dollar value payments. But they are not feasible when the volume of customers and incoming payments increase.

Top AR Pain Points cited by SMBs

Sources: PYMNTS

Let’s look at how your bottom line gets affected at every step in the AR process.

Data Aggregation:

The task of aggregating customer data, payment history, and remittance information is often done manually. Gathering this information manually from multiple sources such as physical records, web portals, emails, and snail mails is time-consuming and requires more resources. Your analysts also get tangled in the manual/clerical tasks and are not able to focus on strategic jobs such as credit and collections.

Collections Dunning:

Managing dunning calls and large-scale customer communication can be tricky if you have a huge client base. The dunning process is run via email exchanges, snail mails, and telephone calls. With a high volume of customer accounts, collection analysts have to personalize communications manually. This is tedious and causes delays in your workflows.  The overhead cost of sending snail mails and making telephone calls also increases the operational expenses.

Payment Collection:

Payment collection is often done manually via cash or check deposits.

a. Checks:  Processing a paper check can take 2 to 10 business days.

Factors that affect check processing time and costs include:

  • Relationship with the bank
  • Applied bank policies
  • Physically depositing checks at the bank (by customer)
  • Time to mail the checks and track its collection at the company
  • Manual invoice matching for check payments
  • Cost of stamps and envelopes
  • Bank integration costs
  • Incidental costs (lost checks, bounced checks, or damaged checks)

Bank of America estimates cost of processing

Sources: Businesswire

b. Cash Deposits: Based on bank policies, processing cash payments can take one to four business days. If you consider other factors such as holidays or system glitches, the overall time-to-cash may further increase. It can also become an inconvenience for your customers.

Invoice Matching:

Many businesses match invoices with the respective payments manually. This can work well if you have a small customer base. However, if you have a large customer base, you will require more time and resources to match the invoices. Manual matching may also lead to errors.

Your communication with other stakeholders and the time to close any open accounts also gets longer when:

  • Remittance information is absent, incorrect, or inaccurate
  • No remittance data attached with the payment
  • Check stubs are not scanned properly by the banks

Dispute Handling:

Dispute handling takes longer than usual when communication happens via email and snail mails. At times, it is only after the payment has been processed by the bank that you learn about the short payment or overpayment. In such cases, it becomes more challenging to handle the disputes, and the resolution time increases, thus leading to bad debt.

Now that you know how the traditional methods of receivables management are hampering your ROI, here is what you can do to overcome them.

Adopting Digital Transformation for Receivables Management

Digital receivables management is the new way of managing your AR. Digital AR practices help to identify short or overdue payments, minimize days sales outstanding (DSO), and reduce the time-to-cash.

Data Aggregation:

Digitizing your AR data records will make the data easily accessible to your AR team. Using OCR engines to read information from the check stub, bots to navigate and collect data from web portals, and email parsing engines to extract the data from emails can help streamline your AR processes. Standardizing data collection methods makes workflows smoother and helps avoid unnecessary time wastage. Post digitization, your finance teams can focus on more strategic tasks instead of manual or clerical duties.

Collections Dunning:

The entire collection dunning process can be optimized with the help of digitization. You can eliminate physical forms of dunning such as snail mails and adopt bulk email messaging instead. This will avoid the hassle of manually personalizing emails and help fast-track the dunning process. Use customer segmentation and prioritization techniques to identify the at-risk accounts. For telephonic dunning, use VoIP services to reduce operational expenses.

Payment Collection:

Adopting convenient digital payment methods is the need of the hour. It will not only ensure a faster time to cash but will also improve the customer experience. Offering multiple payment options will let your customers make the payments in their preferred formats. Here are some of the digital payment methods that are widely accepted.

Multiple Payment options offered by highradius

To learn more about digital payment methods, read this blog on, Redefining Accounts Receivables with Digital Payments.

Invoice Matching:

With automation, the system can easily recognize any exception that comes its way, such as short payments or overpayments, and direct it for exception handling. For full payments, invoices are matched automatically, and directly posted onto the ERP where the accounts can be closed.

63.5% SMBs are shifting away from physical invoicing

Sources: PYMNTS

Dispute Handling:

As the system automatically matches the payment with the invoices, any deduction or dispute can be simply triggered by the system when the payments come in. If you adopt AR software solutions, you can also use the software to create credit memos and write-offs for incoming disputed payments. For deductions, a relevant code can be assigned to the case for faster deduction identification, resolution, and recovery.

To Sum it Up

Relying on traditional practices can put your AR at risk. For many years, SMBs have failed to make conventional collections practices more efficient. With automation technologies now available at affordable prices, businesses can now take better control of their ROI and grow faster. By using machines to handle the tedious work and letting your analyst focus on more critical tasks, companies can increase their collection volumes and close accounts before they become overdue.

At HighRadius, we have helped companies achieve their target ROIs. With the help of RadiusOne, mid-sized business owners can now put their AR on autopilot and overcome the hiccups that negatively impact collections and ROI. Talk to our experts today to learn more about RadiusOne AR Automation Solutions. 

Want to learn more about how to digitize your accounts receivables? Check out our blog on how mid-market businesses are getting smarter with AR automation.

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