4 Common Accounts Receivable Challenges and How To Solve Them

Jan 14, 2021 by Daniella Bourguetts

Most companies have an accounts receivable policy for when to bill, how much to bill, and when to collect. But research shows that not all businesses execute that policy effectively — the average US business has 24% of monthly revenue tied up in overdue invoices.

Having outstanding accounts receivable can really hurt your cash flow, draining the capital you need to invest in growth opportunities, buy new equipment, and hire new staff. And that's just the tip of the iceberg.

A weak accounts receivable management process can cause several other unintended consequences:

  • Failing to follow up on overdue invoices
  • Writing off overdue receivables as bad debt
  • Errors on bills and invoices
  • Allocating payments incorrectly

All of which leads to less cash flow, which means your operations and production may need to slow down, missing revenue targets, and hurting your business.

In this guide, we're going to walk through 4 common accounts receivable challenges and offer actionable ways to solve them. We'll also share a few activities you can do within AR to free up cash and strengthen your working capital.

4 Common problems in Accounts Receivable

In some cases, credit is employed as a way to gain loyalty and grow your customer base, but offering these payment options without a proper plan in place can lead up to cash-flow deficiencies, even jeopardizing operations. Here are some of the most common problems that an Accounts Receivable team might face:

1. Above Average DSO (Days Sales Outstanding)

DSO is the average time it takes credit sales to be converted into cash. A high DSO means your clients are taking up too much time to finalize their debts, going over the agreed payment term. If this KPI runs higher than the industry’s average, make sure the credit plans you’re offering are not more than you can handle. It also may be a smart move to get a new protocol and financial planning in place.

Ways to reduce your DSO:

  1. Set up a proper collection strategy to make sure every invoice get sent on in a timely matter, with clear payment terms. We recommend delivering invoices digitally rather than by mail, so you can speed up billing and collections by having customers set up autopay or recurring payments.
  2. Make it easier for them to pay by adding multiple payment options. There's a lot of research that shows you're more likely to get paid on time if you offer more ways to pay a bill. Not only do you get paid in a more timely fashion, but it also increases the likelihood that the client will become a repeat customer.
  3. Offer incentives to encourage customers to pay early and impose penalties for paying late. For example, offering a discount for paying within 10 days, when your usual payment terms run up to 30 days.

2: Record disorganization

Keeping your invoices organized is the key to knowing how much money you’re owed, by who and when they are expected to pay. Poor Accounts Receivable management could cause a cash-flow deficiency, so having a system that can allow you to have full visibility is crucial for responsible AR management.

Ways to improve ledger management:

  1. Keep your information centralized in one place. While many businesses prefer to use different ERPs, invoicing and payment tools, in the long run these could cause more problems than they solve. It's a hassle for AR teams to match data from one system to another, and reporting quickly becomes a nightmare. It's better to opt for tools that can allow the whole AR process to happen under one roof.
  2. Conduct regular audits of master data to identify customers with abnormal credit limits, payment terms, and/or discount rates.
  3. Start analyzing your company spending more closely. Being able to group certain expenses together is a great way to understand how those expenses benefit your business. If an entire category isn't creating any value for your business, that's something you want to know sooner rather than later.

3: Poor communication with your customers

Establishing communications channels and points of contact is a must at the beginning of any relationship and an important part of getting paid on time. We recommend keeping track of all the times you have been in communication with your customer and through what channels, to keep a healthy information flow.

Ways to improve AR communications:

  1. Update information. Having records that aren't updated can make it easy for invoices to be mailed to the wrong address, which also contributes to late payments. Businesses need to regularly update their customer data in order to avoid these problems.
  2. Send invoices the moment a contract is signed with the payment terms and due date. Then send regular billing reminders tied to milestones such as when goods are shipped, when a job is halfway completed, or when a due date is approaching.
  3. Take advantage of automation tools that can help you set up a recurring invoicing schedule. This way, you can always know when a customer is going to be contacted.

4: Lack of proper policies

As much as we all love signing in new customers and keep our base growing, we still have to be smart about the companies we choose to conduct business. This means that not everyone may be the right fit for your product or service, and having a well-structured credit policy can help you discern between those who would make great customers and those who would not.

Ways to improve AR communications:

  1. Regularly review the credit approval process. As customers and industries change, risk profiles change as well. If customers are in a high-growth industry, or one struggling against economic conditions, you may want to alter their credit terms.
  2. Make sure the terms of sale on credit are clear and fully accepted by your customer. These include the credit period and any discount you decide to offer the customer along with the discount period. Terms of sale may look like this: 2/10, net 30. This means that you offer your customers a 2 percent discount if they pay in 10 days. If they don't take the discount, their bill is due in 30 days.
  3. Develop a strong credit analysis process according to your customer's industry. You can include different methods, such as a credit report or credit scoring.

Talk to the AR and Payment Experts!

An AR automation tool like Paystand can help ease many of these challenges by keeping the whole AR process under one platform for full visibility, and better decision making. If you want to keep learning about how Paystand can be your ally for reducing DSO, organize your records, and improve communication with your customers contact one of our experts.