4 Common Accounts Receivable Challenges and How to Solve Them

May 3, 2022 by Kelsey Banerjee

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

It's no secret that outstanding accounts receivable bottlenecks cash flow and drains the capital you need to invest in growth opportunities, buy new equipment, and hire 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
  • Allocating payments incorrectly

All of which 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 obstacles in the AR management process, you can overcome them.

This guide will walk through four 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 Accounts Receivable Challenges

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

1. Above average Days Sales Outstanding (DSO)

DSO is the average time it takes credit sales to be converted into cash. A high DSO means your clients are taking too much time to finalize their debts, going over the agreed payment terms. If this KPI runs higher than the industry's average, make sure the credit plans you're offering are not more than you can afford. It also may be a smart move to get a new protocol and financial planning in place. 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 in a timely matter, with clear payment terms. We recommend delivering invoices digitally rather than by mail. Electronic invoicing speeds up billing and collections significantly, and you can save even more time by having customers set up autopay or recurring payments.
  2. Make it easier for them to pay by adding multiple payment options. Research 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. 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.

2. Ledger disorganization

Keeping your invoices organized is 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 allows you to have complete visibility is crucial for responsible AR management.

Ways to improve ledger management:

  1. Go paperless. If you don't already have an ERP, invest in one. For those who already have one, you may also want to cut out paper checks and put time into accounts receivable automation. Digitizing and simplifying your AR process is key to improving your ledger overall.
  2. Keep your information centralized in one place. At the same time, it's easy to unintentionally fragment your accounts receivable process. Using too many different ERPs, invoicing, reporting, and payment tools could cause more problems in the long run. 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 end-to-end tools that facilitate the entire AR process.
  3. Audit your AR process. Conduct regular audits of master data to identify customers with abnormal credit limits, payment terms, and discount rates.
  4. Start analyzing your company spend more closely. Grouping certain expenses is a great way to understand how those expenses benefit your business. If an entire category isn't creating value for your business, that's something you want to know sooner rather than later.

3. Poor communication with your customers

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

Ways to improve AR communications:

  1. Update information regularly. Having records that aren't updated can make it easy for invoices to be mailed to the wrong address, contributing to late payments. Businesses need to regularly update their customer data to avoid these problems.
  2. Send invoices as soon as 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. Implement automation. Take advantage of accounts receivable 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 onboarding new customers and keeping our userbase growing, the worst thing we can do is undercut the business through impractical AR management policies. It usually starts innocent enough. Someone, often outside the finance team, might suggest a credit incentive or add a new payment option without considering its effect on the accounts receivable 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 would not. Thus, it's often worth it to revisit and simplify your AR policies.

Ways to improve AR policies:

  1. Regularly review the credit approval process. As customers and industries change, risk profiles change as well. If customers are in a high-growth sector or struggling against economic conditions, you may want to alter their credit terms.
  2. Be transparent. Make sure the terms of sale on credit are straightforward and entirely 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 provide your customers with a 2% discount if they pay in ten days. If they don't take the discount, 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 a credit report or credit 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.

Optimize your AR process

There are many other methods a finance team can use to strengthen a customer relationship 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.

Talk to the AR and Payment Experts

The accounts receivable department is the lifeblood of the business. But even professionals need the right tools to do the job efficiently. And let's be honest, as wonderful as an ERP is, these systems alone aren't enough for an optimized AR management process.

To learn more about how you can optimize your company’s accounts receivable process, watch our free on-demand Webinar on 15 Strategies for Improving AR.