4 Common Accounts Receivable Challenges & How to Solve Them

Sep 13, 2023 by Zazil Martinez

Overdue invoices can impede cash flow and growth opportunities. Common challenges include high DSO, ledger disorganization, poor communication, and inadequate policies. Streamlining processes, offering multiple payment options, going paperless, updating customer information, and automating AR can overcome these. A structured credit policy can help identify suitable customers.

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

Outstanding accounts receivable bottleneck cash flow and drain the capital for growth opportunities, buying equipment, and hiring staff. And that's just the tip of the iceberg.

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

  • Missed follow-ups on overdue invoices
  • Writing off outstanding receivables as bad debt
  • Errors on bills and invoices
  • Incorrect payment allocation

This leads to less cash flow, meaning your operations and production may need to slow down. Consequently, the organization may miss revenue targets while competitors continue to grow.

The good news is that if you can identify accounts receivable management problems, you can overcome them.

This guide will address four common accounts receivable challenges and offer actionable solutions. We'll also share a few activities you can do within AR to free up cash and strengthen your working capital.


What Are The Primary Accounts Receivable Challenges?

Credit is sometimes employed to gain loyalty and grow your customer base. But, offering these payment options without a proper plan can lead to cash-flow deficiencies and even jeopardize operations. In particular, the Accounts Receivable team might face the following:


Above average Days Sales Outstanding (DSO)

DSO is the average time for credit sales to turn into cash. A high DSO means your clients take too long to complete their debts, ignoring the agreed payment terms. If this KPI runs higher than the industry's average, ensure the credit plans you offer are at most you can afford. Getting a new protocol and financial planning in place is also wise.

While your customer relationship is essential — so is getting paid. There are other payment option strategies you can use to keep customers happy.

Ways to reduce your DSO

  1. Streamline your strategy. Set up a proper debt collection strategy to ensure every invoice gets sent promptly, with clear payment terms. We recommend delivering invoices digitally rather than by mail. Electronic invoicing speeds up billing and collections. You can save more time by having customers set up autopay or recurring payments.
  2. Offer your customers multiple payment options. Research shows you're more likely to get paid on time if you offer more ways to pay a bill. You'll get paid timely, increasing the likelihood of the client becoming a repeat customer.
  3. Encourage early or on-time payments. Offer incentives to encourage customers to pay early and impose penalties for paying late. For example, offer a discount for paying within ten days when your usual payment terms run up to 30 days.


Ledger Disorganization

Keeping invoices organized is critical to know how much money you're owed, by whom, and when they're expected to pay. Poor AR management causes cash-flow deficiency, so having a system that gives you complete visibility is crucial.

Ways to improve ledger management

  1. Go paperless. If you still need an ERP, invest in one. If you already have one, cut out paper checks and put time into accounts receivable automation. Digitizing and simplifying your accounts receivable process is vital to improving your ledger.
  2. Keep your information centralized. At the same time, it's easy to fragment your accounts receivable process. Using too many ERPs, invoicing, reporting, and payment tools can cause more problems. It's hard for AR teams to match data from one system to another, and reporting becomes a nightmare. Opting for end-to-end tools that help the entire accounts receivable process is better.
  3. Audit your AR process. Regular audits of master data help identify customers with abnormal credit limits, payment terms, and discount rates.
  4. Analyze your company spending. You want to know if any category isn't creating value. Grouping certain expenses can help to understand how they benefit your business.


Poor Customer Communication

Effective communication channels and points of contact are essential for timely payments, especially at the beginning of any business relationship. Keep track of all the times you have communicated with your customers and through what channels to maintain a healthy information flow.

Ways to improve AR communications

  1. Update information regularly. Not updating records can lead to mailing invoices to the wrong address, contributing to late payments. Businesses need to update their customer data to avoid these problems.
  2. Send invoices after signing the contract, payment terms, and due date. Then, send regular billing reminders tied to milestones like shipping dates, completion status, or the next due date.
  3. Automate your AR process. Take advantage of accounts receivable automation tools to set up an invoicing schedule. This way, you'll know when a customer will be contacted.


Lack of Proper Policies

The worst thing to do is undercut the business through impractical AR management policies. It usually starts with someone suggesting credit incentives or adding new payment options without considering its effect on the AR process. But the hard truth is that not everyone may be the right fit for your product or service.

A well-structured credit policy can help you discern between those who would make great customers and those who not. Revisiting and simplifying your AR policies is often worth it.

Ways to improve AR policies

  1. Regular reviews of the credit approval process. As customers and industries change, risk profiles do too. You can alter customers' credit terms if they're in a high-growth sector or struggling against economic conditions.
  2. Be transparent. Ensure the terms of sale on credit are straightforward and accepted by your customer. These include the credit period and any discount you decide to offer, along with the discount period. Terms of sale may look like this: 2/10, net 30. You give customers a 2% discount if they pay in ten days. If they don't take the deal, their bill is due in 30 days, as usual.
  3. Back up your strategy with data. Develop a robust credit analysis process according to your customer's industry. You can include different methods, such as credit reports or scoring. Providing the data based on each payment option to the management team can help promote buy-in for any changes you want to make to the AR process.


How Do You Solve Accounts Receivable Problems?

Finance teams can use many methods to strengthen customer relationships without bottlenecking cash flow. Some examples are:

  • Offering "Zero-Fee" payment options for preferred methods.
  • Using a convenience fee to discourage unwanted payment methods.
  • Automate sending invoices, reconciliation, and follow-ups.
  • Accept only electronic payments.
  • Use flat-rate payment processing plans to reduce costs.
  • Enable customers to save their payment options securely.
  • Provide automated, certified receipts to customers.


What is Essential in Working with Accounts Receivable to be Successful?

The accounts receivable department is the lifeblood of any business. But even professionals need the right tools to do an efficient job. As wonderful as an ERP is, these systems alone aren't enough to optimize all the challenges in the accounts receivable process.

To learn more about optimizing your company's accounts receivable process, watch our free on-demand Webinar on 15 Strategies for Improving AR.