5-Minute Guide to Accounts Receivable Management

May 16, 2023 by Kelsey Banerjee

Accounts receivable management is critical for maintaining healthy cash flow, and businesses can have up to 24% of monthly revenue tied up in AR. A flawed billing and collection process can cause cash flow issues, missed opportunities, and high costs.


Accounts receivable management is an essential part of maintaining healthy cash flow. A streamlined and efficient AR process prevents your existing capital from going to waste, putting your business in a better position to reduce debt, lower costs, drive growth, and outperform your competitors.

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

And let's face it, a flawed billing and collection process could dry up a company's cash flow or cause operations to grind to a halt, driving costs even higher for your business. But that's not all. Even if a firm's current cash application is "functional," sluggish payments and manual processes weaken its financial position and often translate into missed opportunities.


What is Accounts Receivable Management?

Accounts receivables management is the entire lifecycle of asking for and receiving payments from customers. An account receivable (AR) is the payment you invoice customers for products or business services. The more efficient your AR 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 to maintaining healthy cash flow, which means it's essential for everything from paying your staff to acquiring the inventory needed to serve customers.

Research shows that the longer it takes to collect payment on an invoice, the less likely the debt will ever be paid. In other words, late payment can quickly become nonpayment, which means writing off bad debt. As a result, the organization has less money in the bank than estimated, making it more challenging 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.

Here's a snapshot of what a sound and effective accounts receivable process looks like today:

  • Invoices are created automatically, delivered electronically, and scheduled in advance.
  • Timely billing reminders are sent to customers according to their collection plan settings.
  • Most payments are scheduled and automatically collected from accounts on their due date. In addition, customers can self-service and make payments 24/7 via an online portal.
  • Collected payments are matched to outstanding invoices in the accounting system.
  • Payment reconciliation happens automatically, without any manual intervention.
  • Deposits are transferred into the merchant's bank account once payments are processed.
  • Reports are automatically generated with a deposit's details, transactions, and any invoices and sales orders it affects.

Even for the most accomplished finance team, setting up this automated receivables management process takes time and resources. We won't go into the details here, but you can read more about how to automate payment collection in this step-by-step article.

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


10 of the Most Common AR Management Challenges

Despite the AR team's importance, 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.

The truth is that businesses face many challenges when it comes to their invoicing and accounts receivable processes. More often than not, these obstacles come in the form of manual accounting tasks, which take time and resources away from high-value activities.

Some of the common challenges that affect payment processing are:

  1. Difficulty matching payments to invoices
  2. Constantly having to resend copies of invoices
  3. Fielding many customer inquiries about 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. Allocating cash payments incorrectly
  9. Writing off bad debt or unpaid invoices
  10. Rising Days Sales Outstanding (DSO)

Customer questions, filling unpaid invoices, and matching financial statements with outstanding invoices take considerable time. As a business begins to scale, this lack of a healthy cash flow system ultimately bottlenecks and limits growth. Moreover, poor cash collection could destroy the company in times of crisis.


6 Tips to Streamline the Accounts Receivable Management Process

The AR process comes with challenges, but maintaining best practices can help AR teams optimize their time and resources while reducing these obstacles. So, now that we've looked at the top 10 challenges for the receivable process let's look at how you can streamline your AR operations:


1. Keep your accounts receivable process simple

A straightforward receivable management process, from invoicing to collections, will make payment processing and reconciliation faster and make it easier to monitor invoices, identify bottlenecks, and implement changes. A complex AR and invoicing process often confuses customers and the finance team. 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 low-quality sales or post-sales experience may not make timely payments as they try to resolve lingering issues. Centralizing project documentation and ensuring all 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. Whether you bill customers directly or invoice small businesses, providing more payment methods can reduce late payments and foster a healthy cash flow. This is because the convenience of choosing a preferred payment option takes less work for your customer than if they tried to fit their model to 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

Your invoices must be sent 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 out the general collection timeline in the customer contract and then use the same timeline when sending out collection notices for outstanding accounts.


6. Use AR automation

One of the best ways to accelerate payments and foster healthy cash flow is automating the accounts receivable process. Collecting more timely payments with automated invoice reconciliation, collection workflows, payment portals, remittance generation, and more is now possible.


How to Get Started with Accounts Receivable Automation

AR management automation saves your business time, money, and resources. There's no question about it. Automated cash applications, payment reminders, and self-service customer payment portals contribute to less time spent on cumbersome, manual tasks. At the same time, CFOs and the AR division can focus on strengthening the organization's financial position, adjusting credit terms, and crafting better accounting strategies to keep the money flowing in.

Modern AR management solutions like Paystand alleviates AR challenges with features like scheduled billing reminders, branded customer payment portals, notarized receipts, recurring payments and subscriptions, collections automation, automatic reconciliation, and tools to help you manage disputes and refunds. Known as the Venmo of B2B transactions, Paystand provides a secure and effortless way to ensure timely payments, incentivize electronic payments, automatically match invoices, and generate comprehensive financial reports.

There's also no need to retrain and relearn a whole new program—Paystand integrates with most ERP accounting software systems and offers flat-monthly pricing to keep your costs low and predictable. So once the implementation is complete, you're ready to start automating your payment collection process.

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