The main objective of efficient accounts receivable (AR) management is to increase cash flow from credit sales to customers. AR processes play a crucial role in the accounting cycle.
Many businesses rely on workflow tools to address any deficiencies in the accounts receivable process. Along with effective software for managing accounts receivable, companies must have a robust process for managing accounts receivable that comprehensively covers all aspects of the AR cycle.
Common Accounts Receivable Management Issues
The AR process is a component of the order-to-cash process (OTC). AR management includes many moving parts that all work together to achieve good cash flow. While this list is not all-encompassing, these critical issues affect how well a business manages its AR.
1. Inefficient Workflows
After a sale, an order team member finalizes and enters it into an accounting system. Then a biller creates an invoice. An invoice is necessary to ensure a customer will pay. Invoicing typically occurs after the delivery of an order, and any disruptions in the flow of this part of the OTC process affect the accuracy of the invoice.
Some customers require specific documentation alongside invoices, such as evidence of delivery or a purchase order number. Failure to provide such crucial information may lead to delayed orders and late payments. AR automation tools are especially useful in high-volume settings. AR software can automate the order-to-cash process to minimize errors and improve cash flow.
The general order-to-cash process includes these areas:
- Order Management
- Billing
- Cash Applications
- Collections
- Customer Service
Businesses should consider where to include customer success teams in their hierarchy. All employees in every department of an AR team should be prepared to facilitate customer service requests. In addition, AR managers must work with other departments to ensure there are no breaks in the OTC that could cause AR issues later in the cycle. All workflows should follow Generally Accepted Accounting Principles (GAAP).
2. Weak Credit and Collection Policies
Poor collections strategy can cause cash flow shortages by leaving unpaid invoices unattended. The longer an invoice remains unpaid, the greater the risk of it remaining unpaid. AR Managers monitor collections by establishing a collections process. This involves credit evaluation, aging management, and cash applications.
The accounts receivables process covers these areas while incorporating appropriate accounting controls to ensure effectiveness. Accounting controls are systemic checks and balances to ensure a company’s accounting processes prevent fraud. The process should specify who performs each action and how it is executed and audited to ensure accuracy. Collections processes should be reviewed periodically for improved efficiency and outcomes.
If a business manages collections without software tools, they risk overlooking key accounts, leaving invoices unpaid, and potentially missing opportunities to identify misapplied cash receipts. Implementing workflow automation streamlines the collections process and prioritizes accounts that require immediate attention. Accounts receivable software provides dashboards with a high-level overview of your AR.
AR processes must include tasks to perform credit analysis on new and existing customers to verify their ability to pay. Credit limits and holds should also be implemented on customer accounts to control bad debt. Customers who fail to pay on time may lose their buying privileges. These controls can be automated using AR software.
Manual collections management causes missed opportunities to inform customers of past-due billing. This approach typically involves collectors making active calls, which may be time-consuming and less efficient. However, by adopting a workflow solution, email notifications can be automated and sent to customers with past-due balances. This strengthens results from collections activity and allows collectors to focus on aged accounts.
3. Disorganized Accounts Receivable Data
An accounting system can generate reporting known as the aging of accounts, which shows the outstanding balances owed by customers and their respective ages. Failure to monitor this data results in a rise in bad debt exposure. Manage accounts receivable data using basic computer tools such as spreadsheets or sophisticated AR software to identify potential collection risks. AR software allows AR managers to customize reports to show past due customers by business or product line, sales volume, or customer profile type, such as premier accounts.
The more organized accounting data is, the better it is to analyze. Accounts receivable data must also be accurate. Inaccurate data leads to customer service issues. For example, if your AR data has incorrect balances, your collections team could contact a customer and demand payment for an invoice that is not past due. Automation tools prevent these problems with automated reporting.
Managing bad debt, also known as “allowance for doubtful accounts” or “write-offs,” is one of the more important reasons to organize accounts receivable data. Many companies create bad-debt reserves, funded by taking cash from net income to offset potential financial risk. Companies must expense the invoice as a write-off when a customer fails to pay an invoice. Write-offs affect a company’s bottom line. Organizing accounts receivable data for proper analysis mitigates bad debt exposure.
4. Poor Cash Applications
The cash applications stage of the accounts receivable cycle directly impacts cash flow. Improper management can hinder the effectiveness of the AR process and increase a business’ average days-to-pay record. Cash receipts decrease the accounts receivable balance and increase the cash account. AR managers can control outstanding AR by tightening cash application processes.
Improve cash applications in these key ways:
- Bank Deposit Reconciliation – AR departments improve cash flow by quickly monitoring incoming receipts and recording them to the accounting ledger.
- Consistent Resolution of Unapplied Cash Reports – Unapplied cash reports show AR Managers the cash receipts recorded to the ledger but not applied to an invoice.
- Increasing ACH and Credit Card Payment Methods – This deters customers from sending paper checks through the mail, which can prolong cash receiving and increase invoice aging.
- Setting Up Banking Lockbox Services – Banking lockbox services allows your cash team to focus on pertinent issues affecting cash applications. Lockbox services include receiving, scanning, and auto-applying payments in some cases.
Large businesses become overwhelmed with high volumes of incoming cash receipts. These volumes increase the likelihood of cash receipts being misapplied to the wrong customer. Overcome this challenge with accounting automation which can automate many components of cash applications.
5. Inadequate Staffing
The effectiveness of an accounts receivable management process relies on qualified personnel. Effective accounting specialists for billing and collection roles possess customer service, negotiation, resourcefulness, and account management skills.
On the other hand, basic accounting knowledge, attention to detail, and follow-through skills are essential for cash application roles. Moreover, AR managers require data analysis, auditing, analytical, and technical skills. Every part of the OTC should be adequately staffed. When there is insufficient staffing, the AR workload will bottleneck, leading to poor customer service and frustrated employees.
Systemic automation relieves lean accounting departments by automating simple tasks such as mass emailing collection notices, billing recurring charges, and enforcing accounting controls to prevent an accounting worker from processing transactions against GAAP standards.
Wrap up
A successful AR team has members with specialized skills. While skills are crucial, automation tools for AR can help maximize their effectiveness. Accounts receivable software increases productivity, allowing the AR team to focus on reducing AR balances, preventing a backlog of customer orders, and ensuring timely payment of invoices.