The Ultimate Guide to Accounts Receivable Management

Feb 7, 2024 by Zazil Martinez

Accounts receivable (AR) management is crucial for maintaining a healthy cash flow within any business. It's estimated that up to 24% of monthly revenue can be tied up in AR, emphasizing the significance of efficient management strategies.

Accounts receivable management is an essential part of maintaining healthy cash flow. A streamlined and efficient process prevents existing capital from going to waste. This can put your business in a better position to reduce debt, lower costs, drive growth, and outperform your competitors. A flawed billing and collection process can cause cash flow issues, missed opportunities, and high costs.

In this guide, we'll dig into the various aspects of AR management, address common challenges, and explore effective solutions to optimize your processes.

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Understanding Accounts Receivable Management

At its core, accounts receivable management is the lifecycle of asking for and receiving customer payments. An account receivable is the payment you invoice customers for. The more efficient your process is, the faster your business gets paid and the more flexibility the organization has to pay vendors or invest in growth.

Some critical aspects of AR processes are:

  • Invoicing
  • Payment follow-ups
  • Setting credit and payment terms
  • Debt collection
  • Matching payments with outstanding invoices
  • Resolving payment disputes

Collecting receivables is vital for a healthy cash flow. This means it's essential for everything, from paying your staff to acquiring the inventory customers need.

Research shows that the longer it takes to collect an invoice's payment, the less likely customers will ever pay the debt. In other words, a late payment can become nonpayment, which means bad debt. This results in less money in the bank than estimated and more challenges to maintain quality business services.

Accounts receivable are best managed on a consistent and routine basis. Regardless of your system, ensuring timely payment processing is crucial.

Additionally, monitoring and managing AR turnover, which measures how efficiently a company collects payments from customers, is essential for optimizing cash flow and working capital management.

Implementing an Effective AR Process

A well-designed AR process involves several key steps:

  • Automated Invoicing. Create and deliver invoices automatically, electronically, and scheduled in advance.
  • Timely Billing Reminders. Send reminders to customers based on collections strategy to encourage prompt payments.
  • Automatic Payment Collection. Facilitate scheduled and automated payment collections while providing customers with self-service payment options 24/7 via an online portal.
  • Payment Reconciliation. Automatically match received payments with outstanding invoices within your accounting system.
  • Seamless Deposit Processing. Transfer processed payments to the merchant's bank account without manual intervention once payments are processed.
  • Comprehensive Reporting. Automatically generate reports with deposit details, transactions, and any invoices and sales orders it affects.

Even the most accomplished finance team takes time and resources to set up this automated receivables management process.

Businesses and professionals face several accounts receivable challenges when optimizing their accounting processes. So, before you map your ideal process, you must look at the potential obstacles.


10 of the Most Common AR Management Challenges

On average, US businesses have 24% of monthly revenue tied up in AR, payment terms, or trade credit. Almost half of the organizations globally cite the speed of AR processes as a top concern. These high numbers suggest there is room for improvement regarding receivables.

Account receivables management requires extensive thought and care when implementing new solutions. As simple as cash application sounds, anyone who has ever been in charge of debt collection or invoice payments knows how tedious and complex the process can be.

Businesses face many challenges regarding their invoicing and accounts receivable processes. These obstacles often come as manual accounting tasks, taking time and resources away from high-value activities.

Some common challenges affecting payment processing are:

  1. Difficulty matching payments to invoices
  2. Constantly having to resend copies of invoices
  3. Handling numerous customer inquiries regarding invoices
  4. Offering a subpar customer service experience
  5. Unable to accept credit card payments in a secure environment
  6. Correcting errors on bills, invoices, credit terms, or duplicate payments
  7. Receiving late payments
  8. Misallocating cash payments
  9. Writing off bad debt or unpaid invoices
  10. Rising DSO (Days Sales Outstanding)

Customer questions, filling unpaid invoices, and matching financial statements with outstanding invoices take time. This lack of a healthy cash flow system bottlenecks and limits growth as businesses scale. Poor cash collection could destroy the company in times of crisis.

ar challenges for 2024

6 Tips to Streamline the Accounts Receivable Management Process

The AR process comes with challenges. However, best practices can help teams optimize the accounts receivable flowchart and reduce obstacles. Now that we've looked at the top 10 accounts receivable challenges, let's look at how you can streamline your AR operations:


1. Keep your accounts receivable process simple

A straightforward process –from invoicing to collections– will make payment and reconciliation faster. This makes monitoring invoices, identifying bottlenecks, and implementing changes easier. Audit your workflow regularly to ensure that no unnecessary steps have been added and that the process is as standardized as possible.


2. Communicate frequently

The cornerstone of healthy customer relations is solid communication. One way to better facilitate this is to ensure that all customers have a method to connect with your team, whether that's by phone, email, chatbot, or another option. However, it can also help to have a sound and reasonable system for sending payment reminders and collection requests. You'll also want to inform them immediately when you change your billing system.


3. Invest in customer service

Customers facing sales-related issues may not make timely payments as they try to resolve them. Centralizing documentation and ensuring essential information is sent to the customer along with the invoice can reduce or resolve disputes while streamlining payments.


4. Provide more payment options

Credit cards, cash, and paper checks are no longer the only forms of customer payment. More payment methods can reduce late payments and foster a healthy cash flow. The convenience of choosing a preferred payment option takes less work for your customers than if they tried to fit a specific method. Providing a self-service payment portal in your invoice will make it even easier for them to pay on time.


5. Adhere to payment terms

Send invoices according to the payment terms in the customer contract. Too soon or too late can strain the customer relationship and result in unpaid invoices. The same is true of your collection workflow. It's best to write the general collection timeline in the contract and use the same timeline when sending collection notices for outstanding accounts.


6. Use AR automation

Automating the accounts receivable process is one of the best ways to speed up payments and foster healthy cash flow. Collecting timely payments with automated invoice reconciliation, collection workflows, payment portals, remittance generation, and more is possible.


How Do You Get Started With Accounts Receivable Automation?

AR automation saves your business time, money, and resources. Automated cash applications, payment reminders, and self-service customer payment portals contribute to less time spent on cumbersome, manual tasks. Businesses can focus on strengthening their financial position and crafting better strategies to keep the money flowing.

Modern management solutions, like Paystand, ease AR challenges with features like:

  • Scheduled billing reminders
  • Branded customer payment portals
  • Notarized receipts
  • Recurring payments and subscriptions
  • Collections automation
  • Automatic reconciliation
  • Tools to help you manage disputes and refunds.

Known as one of the best AR automation software, Paystand provides a secure and effortless way to ensure timely payments. It incentivizes electronic payments, automatically matches invoices, and generates comprehensive financial reports.

With Paystand, there's no need to retrain and relearn a whole new program. It integrates with most ERP accounting software systems and offers flat-monthly pricing. This helps you keep costs low and predictable and avoid outsourcing your AR process. Once the implementation is complete, you're ready to start automating your collection process.

Learn how to optimize your receivables management and cash flow cycle, and speak with one of our experts today.

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