Strategic Approaches to AR Collections to Unlock Your Working Capital

Table of Contents

1. Incentivize Online Payment Channel Adoption
2. Streamline Collections with Automation
3. Track Key Collections Efficiency Metrics
4. Choose the Right AR Collections Software
5. Rethink Customer Communication
6. Get Paid Faster with Paystand

Key takeaways:

• Collections are the most important part of AR processes. Small efficiency gains have an outsized impact on bottom lines.
• AR automation software streamlines collections by handling repetitive tasks, enabling self-service, and freeing staff for higher-value problem-solving activities.
• Tracking key metrics like DSO, CEI, ADD, and AR turnover ratio provides clear visibility into collections efficiency and working capital status.
• Effective collections require meeting customers on their preferred communication channels, providing proactive reminders, and centralizing documentation to enhance the customer experience.

Is your cash flow suffering from sluggish accounts receivable collections right now?

While many finance leaders focus on growth strategies and cost-cutting initiatives, they often overlook the uncollected revenue in their accounts receivable. Collections aren't just an administrative task—they're essential to your company's financial health.

Improvements in collections efficiency directly impact your bottom line, freeing up cash that's currently trapped in aging receivables.

In this article, we'll explore practical, proven strategies to enhance your accounts receivable collections approach. Whether you're dealing with payment delays, process inefficiencies, or customer communication challenges, you'll discover how to overcome these obstacles and optimize your AR department's performance.

Incentivize Online Payment Channel Adoption

Transitioning from paper-based to digital payment channels delivers transformative results for accounts receivable collections. According to McKinsey, B2B digital payments process 50% faster than paper checks, with error rates dropping by 60%. 

This dramatic improvement directly impacts your bottom line by accelerating cash flow and reducing resources dedicated to error resolution and reconciliation.

To capture these benefits, you'll need strategic incentives that overcome customers' psychological attachment to traditional payment methods. Offer tangible rewards like cashback or fee waivers for digital payment adoption, including ACH and zero-fee bank transfers. 

Emphasize mutual advantages: faster payment processing for you and simplified accounting for them. Implement a gradual transition plan for resistant customers with clear ROI information demonstrating time and cost savings.

Make digital payment adoption simple by implementing payment tokenization to store payment information for repeat transactions securely. Reduce form fields and clicks to minimize abandonment.

Develop clear guides and support materials addressing common questions about your digital options. This investment in frictionless payment experiences pays dividends through improved collections efficiency and stronger customer relationships, transforming a routine transaction into a competitive advantage.

Streamline Collections with Automation

As transaction volumes increase, manual processes can’t keep up, creating bottlenecks that automation eliminates. By automating routine communications and payment processing, your AR staff gains valuable time to focus on resolving complex payment issues requiring human attention and relationship management.

This shift from reactive processing to proactive problem-solving can dramatically improve collections outcomes. Automated systems excel at managing standardized workflows—sending timely payment reminders before due dates, confirming receipt of payments, and flagging accounts that require escalation based on predefined criteria.

Self-service capabilities are another crucial benefit of collections automation. When customers can access their account information, check invoice statuses, and make payments without contacting your team, communication friction that often delays payment is removed. This improved customer experience translates directly into faster collections.

Additionally, automated systems maintain detailed logs of all communications and payment activities, providing clear audit trails that prove invaluable when resolving disputes or analyzing collections performance.

Perhaps most importantly, automation provides scalability that manual processes cannot achieve. As your business grows, your AR function can handle increasing invoice volumes without proportional increases in headcount.

Track Key Collections Efficiency Metrics

Effective management of accounts receivable collections requires data-driven insights, which can only come from consistently tracking the right metrics. These metrics remove guesswork and clearly show your working capital situation.

Days Sales Outstanding (DSO) remains the foundational metric for AR collections. It measures the average days it takes to collect payment after a sale. While widely used, DSO alone doesn't tell the complete story.

The Collections Effectiveness Index (CEI) offers a more nuanced view by comparing what was collected versus what was available for collection during a specific period. This percentage-based metric helps evaluate your team's overall collection performance regardless of sales fluctuations.

Average Days Delinquent (ADD) focuses specifically on overdue invoices, helping you understand how long past-due accounts remain unpaid and where to target your collection efforts.

The AR Turnover Ratio provides insight into how efficiently your company converts credit sales into cash by measuring how many times your accounts receivable are collected during a period. 

A higher ratio indicates more frequent collection of receivables and better cash flow management.

Real-time dashboards that visualize these metrics can help your team stay focused on key priorities and quickly identify emerging collection issues before they become significant problems.

Automation plays a crucial role in tracking these metrics accurately and efficiently. Advanced AR systems can calculate these KPIs automatically, eliminating manual data compilation and reducing the risk of calculation errors.

With real-time data synchronization, your metrics always reflect the current state of your collections, enabling faster response to changing conditions. Here's a table summarizing each metric, when to use it, ideal values, warning signs, and what actions to take if you spot these signs.

Choose the Right AR Collections Software

For finance leaders, making a decision about AR collections software isn't merely about features—it's about aligning technology with their strategic financial goals.

Successful implementations begin with clearly understanding your collection pain points: Are slow approvals delaying invoices? Are payment options too limited? Do you lack visibility into collection statuses?

Integration capabilities should top your evaluation criteria. Your AR collections software must seamlessly connect with existing ERP and billing systems to create a single source of truth. Without this integration, you'll simply replace one siloed process with another. 

Also, prioritize solutions that leverage AI for intelligent credit recommendations and payment forecasting. These capabilities transform raw data into strategic insights for your team.

Robust security and compliance features aren't optional these days. The right software maintains strict data protection standards while providing real-time dashboards highlighting critical metrics like aging accounts, payment trends, and collection performance. 

Bank integration capabilities distinguish leading solutions by instantly verifying fund settlements and transfers. This eliminates the uncertainty that can undermine accurate cash flow and working capital forecasting.

Look at how easy your solution is to implement. Even the most sophisticated technology will fail if your team resists adoption. Prioritize solutions offering comprehensive onboarding and intuitive interfaces that minimize disruption. 

The right AR collections software doesn't just automate existing processes—it empowers your finance team to evolve from transaction processors into strategic partners, driving improved cash flow across your organization.

Rethink Customer Communication

Effective accounts receivable collections depend as much on communication strategy as on process efficiency. Traditional approaches often treat collections as a one-way transaction rather than an opportunity to build stronger customer relationships.

Reimagining how you communicate with customers about payments can significantly improve both collection rates and customer satisfaction.

Meeting customers on their preferred communication channels represents a fundamental shift in collections strategy. Rather than forcing all customers into a standardized communication funnel, modern approaches recognize that different customers prefer different methods—whether email, SMS, customer portals, or even traditional phone calls.

This flexible approach removes unnecessary friction from the payment process. By tracking response rates across channels, you can develop targeted communication strategies that maximize effectiveness for each customer segment.

Proactive payment reminders have proven particularly effective in reducing late payments. Instead of waiting until an invoice becomes overdue, sending friendly reminders several days before the due date helps customers plan their payments and address potential issues before they cause delays.

These preemptive communications also demonstrate your organization's professionalism and attention to detail. When designing these reminders, focus on clarity and actionability—each message should clearly state what is owed, when it's due, and provide direct payment options.

High-value accounts benefit from relationship-based communications that reference specific projects and include personalized notes from their dedicated account manager. For habitually late payers, emphasize clarity and urgency with concise messaging highlighting payment deadlines and consequences of delays.

Centralizing documentation is equally crucial for smooth collections. When communicating about payments, attach all relevant supporting materials—original invoices, purchase orders, delivery confirmations, and previous correspondence.

This comprehensive approach eliminates back-and-forth exchanges that delay payment processing and frustrate customers. Self-service access to this documentation further streamlines the process, allowing customers to retrieve what they need without waiting for your team's response.

This storytelling approach to collections—focusing on the relationship rather than just the transaction—transforms what could be a contentious interaction into a positive touchpoint with your brand.

Get Paid Faster with Paystand

Software that reduces your DSO by 30% isn't a tool; it's a strategy. The right accounts receivable collections solution will directly impact your bottom line by unlocking cash that would otherwise remain trapped in aging receivables

Paystand offers a comprehensive collections platform that serves as the connective tissue between all the best practices discussed throughout this article:

• Real-time fund verification - Eliminate uncertainty and delays by confirming fund availability and settlement immediately
• Seamless ERP and accounting integrations - Create a single source of truth for all receivables information
• Customizable AR processes - Tailor collection workflows to your specific business requirements
• Automated communication sequences - Schedule timely reminders without manual intervention
• Comprehensive analytics dashboard - Track key metrics like DSO, CEI, and AR turnover in real-time

By implementing Paystand's collections automation, you can transform your accounts receivable from a reactive administrative function into a strategic driver of improved cash flow and working capital optimization.

Curious about how you can cut your DSO in the next 90 days? Explore collections with Paystand.