5 Strategies for Effective Accounts Receivable Management
In today's business environment, it is crucial to have a robust and cost-effective payment process. Achieving this requires careful consideration of data, hidden costs, and risk while balancing time, bandwidth, and customer relationships. Your AR staff may be spending a lot of time taking, processing, and reconciling payments, and your business may be paying high and unpredictable credit card fees each month.
A robust, cost-effective payment process isn't something that happens by itself. It's a thoughtful process of weighing data, hidden costs, and risk on one hand while balancing time, bandwidth, and customer relationships on the other.
Regarding payments, is your accounts receivable department stuck in the 1970s? If so, your day-to-day might look like the following:
- Customers can only pay invoices on your terms using mailed paper checks and phoned-in payments.
- Your AR staff hemorrhages time accepting, processing, and reconciling payments.
- Your business pays high, unpredictable credit card fees each month.
- The average invoice needs to get paid faster to meet cash flow requirements.
Whether you're your company's CFO, controller, or finance manager, if these issues resonate with you, it may be time to find a different payment strategy. Here are five strategies that will help you optimize your accounts receivable process.
1. Define Your Goals for the Payment Process
Your business needs a new payment strategy due to particular or multiple problems. Taking those problems and thinking about the solutions will better understand what you hope to achieve. Here are some of the most common issues in the payments arena:
- Staggering payment fees. The cost of paper checks (from $4 to $31 per check) and exorbitant credit card processing fees could be a strain on the business. What can you do to end transaction costs?
- High manual effort. AR staff spend massive amounts of time processing payments, correcting errors, and talking to customers. How can you cut the bulk of this manual work?
- Accounts receivable customer experience. It's frustrating for customers to must spend extra time mailing in a check or calling to correct an invoice error. What can you do to remove points of friction?
- Impaired AR metrics. Your business may experience wide-ranging impacts from slow or lost payments. How could you erase these payment gaps?
💡 Tip: When choosing goals for your payment strategy, go beyond high-level metrics. Dig into why something is happening. Knowing that your sales are 45 days outstanding is a good start, but knowing that 45 days is short for your customer's industry is actionable. With this information, you can make a decision.
Other problem areas could be specific to your business –and that's ok. It's essential to understand them and tie them back to business goals. In this case, the accompanying goals are cost reduction, time savings, better customer experience, and improved AR metrics. With these goals in mind, you can align any proposed payment changes.
2. Document How You Process Payments Today
If you've considered these challenges, you're ready to toss down manual processes and bring in automation. But having a 360° view of how the business currently takes payments is critical. Without that knowledge, you might miss out on problems that digitized payments can solve.
Gather up the following inputs for a broader understanding:
- Make a list of all the payment methods your business accepts. Any payment method taken goes on this list. To have a comprehensive picture, you must account for all accepted forms of payment. This can be anything from checks, cash, wire transfers, credit card payments, etc.
- Review your accepted payment method list and record all the processing options. This means understanding how your business processes each type of payment. You can take checks via snail mail, in-person, and online eChecks. Cash could be in-person only, and wire transfers could be online only. Whatever the case, make sure you have a record of how each payment type is accepted.
- Find out how key stakeholders use each payment option. Knowing who interacts with payments and the impact of changing your payment structure is imperative. Which employees can process payments for each method and processing option? Clerks may only process paper checks, while customer service reps can process credit card payments and wire transfers.
- Enlist all the tools used to record and process payments. Let's say a customer emails in a paper invoice with a check enclosed. Where does it get recorded? If a credit card payment takes place online, what system takes the payment, and how is the message delivered to the system of record? It's critical to know all the systems involved and how they communicate.
3. Decide What You Want to Change About Your Payments Process
This valuable information on payment processes allows you to consider changing them. To improve your payment experience, you've got to know what's wrong with it today.
Look at the details you collected above and consider which inputs are most problematic. Paper checks may take a ton of time for your AR team to key in. Per-transaction fees are likely either incurring high costs or limiting the payment methods you offer (or both). Credit card payments recorded over the phone may be error-prone, and the customer experience could suffer. Using disparate payment types with wide-ranging fees can create a confusing, decentralized experience for customers and employees.
💡 Tip: Companies looking to upgrade their payment process may overlook capital wasted on fees and markups. Before creating a new payment strategy, look for gaps and opportunities to drive significant change.
Find the problem areas of your payment process. Some of them are obvious, others not so much. Most will tie back to the goals you created, but one that causes serious problems may not even be on your radar. Evaluating what you would like to change about payments could help you add to or refine your list of goals. Now is the time to do it before making any changes.
4. Analyze Your Migration Process and How it Affects All Parties
Now that you have goals, information, and a preliminary plan, it's time to get real. As much as you want to make sweeping changes and implement your ideas, remember that they can affect others. Here's a handful of questions and the answers to get you started:
- How will the customer payment experience change? Customers can save time and have an improved experience with digital payments. Yet, some may be less willing to adopt new payment methods. Consider how you might manage the change to cut customer loss. Consider allowing a grace period for customers to continue paying by check, after which they'll be charged a percentage fee. Or offer a discount on a customer's first invoice using an online credit card or eCheck payment.
💡 Tip: When shifting your customers to digital payments, consider how they already behave. Do they focus on convenience? Are they trying to avoid fees? More often than not, knowing these questions helps you communicate the benefits of switching to alternative payment options.
- How will the employee payment experience change? Consider how this change could affect employees. Best-in-class solutions offer options to minimize the tools employees have to interact with by allowing them to stay within their existing toolset. They stand to save time and improve experience, but any changes could cause extra work or need training.
- How would you like to communicate and roll out the new payment options? Customers need to know they can start using your new payment methods. Notifying them via existing payment methods is an effective way to ensure they get the message. If your customer base is large and somewhat fragmented, choose one or two major customer segments first to receive the new payment methods. Any issues with the first smaller group can be addressed before launching the next group.
5. Decide How to Measure Progress on Your Payments Strategy
After defining goals, understanding payment workflows, and thinking about changes and how they affect the business, you've refined your goals. Tying them to accounts receivable metrics will help you establish gains over time.
Relevant changes in existing accounts receivable metrics will point towards improvement. Showing the drop in processing fees when switching from credit card to eCheck payments will prove cost reduction. Recording manual processing time for AR clerks before and after the change can establish time savings. The same goes for customer satisfaction. And you may already be monitoring critical metrics like DSO, time-to-cash, and cost per invoice.
What is the Best Way to Measure Accounts Receivable Performance?
It's crucial to accompany any changes to your payment processes by reviewing the inputs at your disposal and weighing your options. By defining goals, understanding processes, considering the effects, deciding on changes, and measuring progress, you can rest assured you've taken informed and measurable changes.
If you want to leap to digital payments with as little friction as possible, our Controller's Guide to B2B Payment Optimization is the best place to start.
If you want to learn how easy it is to switch to digital payments and automate your cash cycle, book a demo with one of our experts today.