Accounts receivable (AR) collection is a major part of any business. It involves collection of money owed to the business from customers, sometimes past its due date. The process, when done efficiently, keeps the cash flow to the business smooth, and helps the business stay in good financial shape.
Why use better AR collection practices?
Better AR collection practices speed up the overall process. As a result of the faster collection, the overall DSO (Days Sales Outstanding) is reduced. This means that the funds are available to the business at a quicker rate. The business can now use the available funds to aim for growth in desired areas. This gives the company more control over its future and plans.
Thus, the overall welfare of the company is improved by the incorporation of these practices.
Examples of best AR collection practices
Here we discuss some very useful AR collection practices that can significantly boost the business.
Switch to automated AR services
Switching to automated accounts receivable services, using software, is the one biggest step a business can take to improve the AR collection process. Automating the whole series of events saves a lot of time and labor, not to mention money.
Automated AR services can simplify many of the practices discussed below. This can reduce the effort that goes into the work, leaving valuable resources to be used where needed.
As an added benefit, AR software often can also perform predictive analysis of the cash flow, which can help the business plan accordingly.
Use digital means of invoicing
Many businesses, at least at the small and medium scale, still use traditional means of invoicing. The use of pen-and-paper methods, as well as physical mail, causes a significant slowdown in delivery. Traditional methods of invoicing are prone to the same risks of normal mail. This includes losses in transit, transport delays and so forth. Normally, companies issue invoices later than they are normally supposed to. This adds up to late mailing problems, which causes significant delays.
Furthermore, it is much harder to keep track of traditionally mailed invoices. In the case of emailed invoices, digital storage makes the whole process much simpler and straightforward. It is also easier to refer back to email conversations in case of any disputes. All these added benefits means that any company that wishes to improve its AR collection process must seriously consider switching to digital methods of invoicing.
Offer multiple payment options
Often, businesses run into difficulties with payment because they do not offer a diverse range of payment options. This has the potential to seriously inconvenience customers who have a preferred means of payment. Even if they eventually agree to the means of payment asked by the company, it is likely that the process has been delayed. Further, there is the fact to be considered that the relationship with customers is likely to be hurt in the process.
It is a very useful accounts receivable practice to allow for multiple methods of payment. It is likely to incentivise customers to pay up on time. Putting the customers’ needs first is a great way to earn their trust and also make the payment process more efficient.
Have an efficient collections plan
Businesses that do not have an efficient collections plan can complicate matters for themselves when it comes to dealing with late payments. Efficient collections plan involves steps right from the beginning, at the stage of invoicing itself. This could begin with keeping track of invoices during various stages of the business transaction. It also involves having a proper set of alternatives in place for when a customer fails to pay up on time. This includes suitable division of responsibilities for various departments and people involved.
An efficient collections plan saves time and energy because there is a system in place when for various eventualities. This also simplifies things at the customer’s end. They will know what they are dealing with and will be able to proceed smoothly.
Establish a central database
A central database of payments and customers can simplify the process by enabling quick access to all data. This is also a useful tool when the company has headquarters that are separated by space, because it ensures that teams across distances can collaborate. This also helps maintain smooth communication between customers and the business, which is essential for comfortable dealings.
A central database also provides a wealth of data for analysis, which can be used for making suitable decisions for the benefit of the business.
Incentives and penalties
It is a good accounts receivable collection practice to have a system of incentives and penalties in place for payment. This means that early payments are rewarded with bonuses, while late payments are penalized with extra charges. This dual method helps make the customers likelier to pay up on time.
While this does not guarantee that all customers will pay up on time, it is a strong motivating factor for them to make an effort. Even if all customers do not pay up on time, there is going to be a significant portion who will feel urged to pay earlier due to such payment terms. Such a fractional change can still have a positive impact on the finances of the business. It can reduce their DSO (Days Sales Outstanding) by a measurable amount, which is a boost.
Better communication
Communication delays and resulting confusion is another large reason why the process of accounts receivable collection gets lengthened. Having clear channels of communication with customers can significantly speed up the process. It can also help clear up roadblocks in the process efficiently.
Of course, it also helps to automate a large part of the process, via webchat or email. It saves time and effort, instead of having actual human employees working in the communications field. That said, there is a need for a human touch at the higher level too so that the customers do not feel left out by the business.
Establishing a dispute resolution system
For any business, disputes are bound to occur sometimes or the other, when dealing with a large number of customers or other businesses. Some of these could be genuine, such as errors in invoicing, billing or delivery. Others could be caused by a misunderstanding of the payment terms or processes.
Regardless of the cause, having a system in place to deal with disputes is essential. It is a good AR collection practice to have a system ready. It is likely to make the whole process significantly shorter and more efficient. It will also leave a good impression on customers, due to professional behavior of the business.
Clear terms of payment
While having a dispute resolution system is always good, it is of course preferred to avoid debates in the first place. This can be done by making the payment terms as clear as possible at the beginning itself, along with invoicing. As a result, any disagreements arising can be dealt with in the beginning itself.
Analyze KPIs (Key Performance Indicators)
KPIs give insights into the financial health of the company at a glance. Keeping track of KPIs with suitable software can give a lot of useful guidance for how the business is performing. Further, it helps with judging the performance changes with respect to time, as well as compare the business with other competitors.
Having all this information at hand can help make important decisions regarding accounts receivable collection. It can also shape future policy changes required for improving the financial health of the company.
Allow advance payments wherever possible
Allowing advance payments reduces the amount of money that is extended as credit. This is preferred when the customer has a relatively poor credit history. Requiring the customers to pay upfront can save a lot of trouble of dealing with late payments down the line.
Of course, this practice has to consider the fact that not all customers will want to pay up right away. The business has to balance the likelihood of the customer being late with the payments with their need for maintaining good relations.
Sound credit policy
Accounts receivable collection is a byproduct of extending credit to customers. This is a choice that must be done with due discretion because not all customers have the same credit history. They are not equally likely to repay debts on time.
By studying the financial situation of the business as well as the risks the owners are willing to take, a sound credit policy can be made. This can address the matter of choosing which customers to extend credit to and whom not to. As a result, the business will feel more secure when it comes to offering credit to customers, knowing they are likely to pay on time.
Of course, this step involves a lot of background research from the company about their potential customers and their histories.
Escalation when required
A business tries as far as possible to settle late payments internally Sometimes, however, it becomes necessary to take the help of an external agency. When customers are regularly late, well beyond the due date, it is worth considering the assistance of a debt collection agency.
This is naturally not the first option to be considered, given how expensive it can be. However, it is a step worth taking when it is clear that following up on an owed debt is going to be a severe drain on resources. By outsourcing the job, a business can save up on valuable resources and focus on more productive matters.
