Accounts receivable (AR) management is the practice of obtaining customer payment within a given period of time. Organizations that sell products and services use AR management to ensure the proper tracking and management of every step involved in collecting payment after the customer places an order. It’s a vital component of building liquidity and profitability and avoiding bad debts—and it includes much more than simply receiving payment on a bill.
A strong, efficient AR management process can mean the difference between dwindling capital and a booming business. But companies still using manual procedures to operate their AR will run into various roadblocks that impact cash flow and customer satisfaction.
To gain a thorough understanding of the accounts receivable management process and how it supports your AR engine, you’ll first need to master the basics of accounts receivable. Here, we’ll examine what AR is, why it’s important, and how effective AR management can benefit your business.
TABLE OF CONTENTS
- Accounts Receivable and AR Management
- Why Does Accounts Receivable Management Matter?
- The Accounts Receivable Management Process
- What Are Some Common Challenges of Accounts Receivable Management?
- The Key to Efficient Accounts Receivable Management: Automation
Accounts Receivable and AR Management
While AR management refers to the specific processes used to gain understanding of and collect owed payments, accounts receivable is the broader set of steps it supports. Let’s take a closer look at the AR department and how it operates.
What Is Accounts Receivable?
Accounts receivable refers to the payments owed to a business by the customers. They represent lines of credit for previous purchases and act as recorded assets on the organization’s balance sheet. Because AR is considered both a legal obligation and current asset, customers must pay their balance within a year or less.
Why Is Accounts Receivable Important?
Accounts receivable is essential for companies that sell goods or products to customers, as it allows them to accurately measure what they’re owed for what they’ve already provided. AR enables businesses to:
Keep track of owed profits
Since accounts receivable acts as a running list of owed payments, it helps businesses measure incoming profits. Without AR, it would be difficult for an organization to accurately understand future revenue, identify late-paying customers, and avoid cash flow problems.
Maintain financial order
By analyzing a company’s accounts receivable, stakeholders and investors gain transparency into the business’s financial profitability and liquidity. AR makes it much easier to calculate an organization’s income and future profits and can impact its attractiveness to potential investors.
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Why Does Accounts Receivable Management Matter?
Now that we’ve covered the basics of accounts receivable, let’s dive into AR management—a critical aspect of any organization’s assets.
With robust AR management, an organization is able to better build and maintain customer loyalty. Allowing customers to make purchases on the basis of credit (in lieu of upfront payment) establishes a relationship of transactional ease. And strengthening that relationship happens by offering easy, consistent communication, particularly when it comes to payment. AR management makes sending invoices and related documents a breeze so that customers always know what they owe, when it’s due, and how to submit payment.
A successful accounts receivable management process also helps companies maintain a healthy cash flow, which is essential for avoiding shortages or, in some cases, bankruptcy. Because a business’s future revenue is based on incoming cash, avoiding delays in customer payments is paramount. Organizations must work to effectively manage their accounts to increase working capital and, ultimately, pay their own bills.
In healthcare, for example, accounts receivable management includes proper maintenance of medical billing and collections. If a healthcare organization fails to provide proper, timely billing or collect patient payments, the subsequent limited cash flow can render them unable to cover their own operating costs.
The Accounts Receivable Management Process
The process of managing AR might vary slightly from one organization to the next, but there are certainly some key tasks that should be included in any strong process:
1. DETERMINE CUSTOMER’S CREDIT RATING
Before agreeing to any terms or conditions or accepting a new customer, you’ll first need to identify whether or not they’re able to actually pay for your goods and/or services. This determination is based on the customer’s credit information and helps you decide if you’ll need to require payment upfront rather than extending a line of credit.
2. MONITOR LATE PAYMENTS
It’s essential to keep regular tabs on when each payment is due and to send out payment reminders accordingly. Consistent communication with customers can prevent non-payment and collections which, in turn, ensures healthy cash flow.
3. MAINTAIN CUSTOMER RELATIONSHIPS
Providing excellent customer service by addressing any complaints or questions in a timely manner is crucial for managing solid working relationships.
4. MAINTAIN ACCOUNT BALANCES
You’ll want to be certain that you update customer balances to accurately reflect payments so that nothing falls through the cracks. Both internal teams and customers should have easy access to real-time balances.
What Are Some Common Challenges of Accounts Receivable Management?
Maintaining an efficient AR management process is, at times, a cumbersome task—particularly for businesses who still use manual methods of the past. Without the proper tools to back up the process, companies may face some of these common AR management challenges:
NOT BILLING ON TIME
Without tools for automatic billing, you’re at risk for delays in customer invoicing, which can negatively impact cash flow and liquidity.
NOT COLLECTING ON TIME
If your method for tracking purchases, invoices, and payments isn’t automatically updated in real time, you might be behind the eight ball on collecting what you’re owed. In fact, businesses who rely on manual AR processes take 67% longer to follow up on overdue payments. This is consequential to your order-to-cash (O2C) cycle, as delays in collection make payroll, acquisitions, accounts payable, and liquidity more complex.
ERRORS IN BILLING, INVOICES, DUPLICATE PAYMENTS, ETC.
Relying on manual or paper invoicing often leads to human error. And since 61% of late payments are a result of incorrect invoicing, billing errors and duplicate payments might be costing you more than you think.
BEING OVERWHELMED WITH THE NUMBER OF INVOICES TO MANAGE
Typically, the more customers you have, the more successful your business. But that’s not the case if you’re struggling to keep up with timely invoicing and payment. If you don’t have the proper tools to help you efficiently and effectively manage various customers and their respective invoices, your team is likely to drop the ball—resulting in poor customer relationships, workflow visibility, and cash flow.
The Key to Efficient
Accounts Receivable Management: Automation
Robust AR management requires a strong process backed by powerful tools. Manual methods of the past have made way for automated systems, which offer a more efficient, seamless process for managing AR. Automation improves the end-to-end invoicing process and ensures hands-off, accurate completion of mundane, repetitive tasks.
What Are the Systems You Need for AR Management?
Not all tools are created equally. In order to successfully manage your accounts receivable process, you’ll need modern technology that offers:
The tool you choose should automate the process of examining the customer’s creditworthiness to determine if your company will extend credit to them or not. It should be easily configurable to reflect the criteria that’s important to your unique business.
MONITORING AND REPORTING
You’ll also need a monitoring and reporting system that keeps track of metrics tied to each of your customers (e.g. on-time payment, accuracy of invoicing, etc.). This will help you gain better insights into customer relationships so you can make informed business decisions moving forward.
Your invoicing system should automatically send out invoices—and reminders about sent invoices, due dates, etc.—to customers after they place orders. Roughly 10-15% of invoices require a payment reminder, so the ability to automatically send these reminders is crucial to receiving timely payments. Automation eliminates the risk of billing errors, invoicing delays, and poor communication with customers.
In order to manage cash flow and financial liabilities, you need accurate, up-to-date bookkeeping that makes it easy to track orders, balances, and other key order details.
CUSTOMER COMMUNICATIONS MANAGEMENT (CCM)
A CCM system is essential for tracking customer info like contact details, contracts, and customer feedback and complaints (particularly those related to AR).
Automation – The Unified Solution for ARM
Automated AR management technology encompasses all of these systems in a single solution. That means less time spent pivoting from one platform to another and more time spent on essential tasks that affect your bottom line. By using automation to help you manage accounts receivable, you’ll reap a number of key benefits:
Removing manual data entry from the equation means your billing is more accurate. It’s no wonder that 50% of businesses have reported they plan to accelerate automation of tasks, as the right automation system can help to both avoid and detect errors for more reliable data and limited invoice disputes.
By automating your AR process, you can eliminate the bottlenecks that otherwise occur in manual processes. From credit review, to manual print-and-post, to emailing and uploading documents to customer portals, human delay often holds up manual AR processes. With powerful automation, customers receive invoices without these obstacles and can thus make payments in a more timely manner.
A robust automated system permits personalized communications, which helps keep customers engaged and provides a better experience throughout their entire customer journey. This ultimately helps with customer retention, as happy, informed customers will keep coming back for more. And since earning new customers is six to seven times more costly than retaining a current one, excellent communication is a factor you can’t afford to ignore.
BETTER VENDOR RELATIONSHIP
Automation offers fewer errors, more accurate billing, and faster billing, which help you facilitate better relationships with vendors. Vendors, like customers, will receive accurate, quickly generated invoices that can be accessed in a single, up-to-date portal.
The right automated solution helps your entire AR process run smoothly, as the system handles your tasks the exact same way from end-to-end. This means fewer deviations from your well-oiled AR machine, saving time on burdensome, manual tasks.
SAVED MONEY – By automating redundant tasks, your team has more time to focus on innovative tasks that improve your overall business. That kind of extra time can mean a world of difference for your bottom line. What’s more, e-invoicing can save your business $4 to $8 per invoice sent, as paper consumption, postage costs, and manual handling of paper invoices all lead to unnecessary spend.
What’s Next? Find the Right Accounts Receivable Management Automation Solution
Efficient AR and accounts receivable management processes are critical to any business’s ability to function. But it can be difficult to keep track of all of the invoices and customer details involved in AR—particularly without the help of automation. With 70% of businesses set to automate their accounts receivable functions, those who maintain outdated, manual methods will likely fail to remain competitive in the future.
However, accounts receivable is only a small (if important) part of your organization’s Finance and Accounting process. Be it accounts payable, procurement, or record to report, MHC offers unique solutions to automate and enhance the performance of your accounting and finance teams.