Top Challenges Accounts Receivable Teams Face and How to Solve Them

Feb 20, 2024 by Zazil Martinez

In today's fast-paced digital marketplace, accounts receivable (AR) teams face numerous challenges that impact a company's cash flow and growth. Even with an optimal rhythm, some remain significant.

Common accounts receivable 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.

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.

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What Are The Main Accounts Receivable Challenges?

1. Slow payment cycles

Timely payments and AR processing are crucial to surviving in the digital marketplace. AR teams must close the gap between collection and the invoicing schedule to optimize cash flow. But the cycle is also slow due to the required manual work.

Managing paper or PDF invoices and checks requires much time and manual labor, which decreases the team's productivity. Even with a lockbox system, collection can take more than a week, assuming the customer pays on time. These long wait times strain a company's cash flow and budget, making it harder to grow and keep up with invoices.


2. Tracking and reconciling payments

Tracking and reconciling payments is a critical component of the AR process. Losing track of payments can result in inaccurate records, causing issues such as double or missed payments, leading to delays in collections and cash flow problems.

Manually reconciling payments can also be time-consuming. It requires matching payments to invoices, which can be tedious and error-prone, especially for businesses with many invoices.


3. Above average 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.

These figures can help us put this challenge in perspective:

  • 54% of businesses expect their payment to be paid later than the due dates
  • 20% of late invoices are late for over two weeks, and 33% are late for over a month
  • Only 6% of manual invoices are paid within 30 days

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


4. 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 accounts receivable management causes cash flow deficiency, so having a system that gives you complete visibility is crucial.


5. Poor Customer Communication

Effective communication channels and contact points 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 accounts receivable flowchart.


6. Lack of Proper Policies

The worst thing to do is undercut the business through impractical accounts receivable 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.

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.

ar challenges for 2024

How to Address Accounts Receivable Challenges?

1. Offering Digital Payment Methods

The best way to reduce delinquency and increase collections is to make it easier and faster to pay invoices. Offering a range of digital payment options, such as credit cards, debit cards, and ACH transfers, can streamline the process. Teams further speed up the AR process when securely storing customer payment data on their platform.

Making bank-to-bank transfers zero-fee and asking for a convenience fee for credit card transactions is excellent to reduce costs and encourage ACH payments.

The right payment solution should allow organizations to deal with hidden costs while making it easy for customers to pay in minutes.


2. Reducing DSO

The first step to reduce your DSO is to 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.

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.

You can also 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.


3. Implementing Automation

In today's market, accounts receivable management technologies such as digital ERPs and AR automation software are no longer just "nice to have"; they are nearly mandatory for businesses of all sizes to survive and thrive.

To address this, AR teams can leverage technology to automate these processes. Automated software matches payments to invoices and notifies of outstanding payments. This saves time, reduces errors, and provides visibility into payment status, allowing teams to identify and resolve any issues quickly.

Automation is a key to unlocking value in AR processes, speeding up B2B payments, and turning a cash flow problem into a solution. For a successful transition, notify customers of the changes. Payment collection is smoother when everyone is informed and on board.

Don’t fear automation. Learn everything you need to know about how it can help your business by downloading this helpful guide.


4. Improving ledger management

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.

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.


5. Strengthening AR communications

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.

Then, you must send regular billing reminders tied to milestones like shipping dates, completion status, or the next due date.

Besides including an accounts receivable flowchart to help teams visualize their process, you can also use AR automation software to set up an invoicing schedule to achieve this. This way, you will always know when a customer is contacted.

Another practical option to eliminate the hassle of communicating with customers is to hire an outsourcing service. This way, the time spent contacting them can be used for other, more strategic and growth-driving tasks.


6. Reviewing AR policies

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

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.

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.

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.

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Take the Next Step

Now that you know the main accounts receivable challenges and the possible solutions to overcome them, you need to find an ally that will allow you to continue to grow without eating into your ROI.

With Paystand, you can do just that. It's a blockchain-based technology platform that conveniently decentralizes your company's finances. It automates your accounts receivable processes, facilitates customer payments with multiple methods, and increases your team's productivity. This helps speed up your cash cycle and reduce your AR turnover days.

If you want to learn more about what Paystand can do for your business, wait no longer. Contact one of our experts and book a demo.