5 Best Practices for Optimization of Accounts Receivable

Respective account receivable policies custom designed govern each business’s decision over when & how to bill and when to collect. But most businesses fail in enforcing such policies effectively or appropriately. This is where business culture remains as the predominant factor that a business must never offer the choice of extending credit to customers without any proper and valid reason. However, if management fails to focus on working capital, the business will end up lending customers free financing. Customers who pay late cause losses on the finance charges alone. Carrying overdue accounts receivable puts the whole business on a cash flow tightrope. Businesses can use the money acquired from avoiding late payments for enriching their growth opportunities, maximize shareholder payouts, and buying new equipment. 

There may be no intention of devising weak accounts receivable policies for businesses but purely because of poor planning & enforcement or failure on focussing over functions that lead to consequences. The reasons why businesses end up in this situation are listed below:

  1. Failure in timely follow up with customers for past due payments

  2. Giving sales representatives for overriding credit limits that lead to bad credits 

  3. Neglecting appropriate training of staffs for dealing late-paying customers

  4. Insufficient attention to the accuracy of bills, invoices, or credit terms 

  5. Incorrect allocation of cash payments for accurate identification of outstanding payments 

The finance and sales departments of respective businesses must work together attentively in the development of payment terms that work for both the business and its customers. As per the studies put forward by Atradius, 39% of invoices are paid late in the United States, 48% of clients delay payment, and most of the businesses offer 28-day terms but the average DSO is 67. This article is emphasized in acknowledging businesses, the best practices that businesses must drive for optimization of Accounts Receivable operations. Centralized Accounts Receivable processing helps businesses realize cost efficiencies via a center of excellence for developing and enforcing common practices and standards. Automating accounts receivable processes eliminate manual data entry errors and cuts down transaction times.

Adoption of Key Performance Indicators (KPI’s) to standard revenue and profit tracking reports, will help businesses for getting an accurate Day Sales Outstanding (DSO) – the percentage of customers paying late, number of invoices/customers passed through the system, unreconciled items or accounts, monthly percentage of write-offs, collection rates over bad receivables and collection efforts for tracking performance on an ongoing basis. OURS GLOBAL’s Accounts Receivable Process ensures smooth cash flow and quicker collection of payments for empowering businesses for focussing on key business tasks required for boosting efficiency and effectiveness.

Following are the Five Best Practices for Optimization of Accounts Receivable: 

 1. Customer credit approval 

Issuing of credit and recovering debt in a timely fashion need a clear-cut process outlined with a clear & concise process. To do so, businesses must do the following:

• Allocation of Responsibilities 

Collecting input from sales representatives while devising policies ensures a clear-cut reflection of market realities. Businesses must have a clear-cut understanding for granting credit, and identifying circumstances when they merit overriding credit limits and situations for justifying holding accounts. After the establishment of such policies, each business’s finance team must be competent in enforcing them, and their sales team for authorizing issue credit or changing of terms without any pre-approval. While driving these approaches, businesses must have a clear-cut aim of not having the finance interruption of sales processes and solid acknowledgment that all sales processes needn’t be good ones. 

• Determination of Assessment of Credit Limits 

Maintaining an internal scorecard for each customer helps businesses in assessing their creditworthiness. This can reveal each customer’s purchase behavior and purchase intervals. With the stringent process, businesses can have background and credit history checks.   

 Commitment for Approval or Rejection of Credit Applications within a Certain Time period 

Businesses lack policies that administer the period for administering credit application processing. Any lag in time frames will lead to result in lost sales and creates repercussions between sales & finances. This fosters a relationship with end-to-end cooperation for realizing long-term success.   

 Regular Review of Credit Approval Process

With each change in customers and industries, the risk profiles vary too. High-growth industries or industries with staggering economic conditions must go for altering their credit terms. Businesses must review their credit approval process on a regular basis and set policies around the same. Checking over financial statements from customers and granting terms for limited time periods should also be reviewed with utmost focus.  

2. Customer master data 

After assigning credit limits, payment terms, discounts, tax rates, and return policies, and any other relevant terms such as the delivery address, e-mail address, etc for specific customers, all such terms must be accurately reflected in the billing and collection systems. Indicating what customer is allowed to purchase, customer master data also infers dollar limits that apply, payment terms, possibilities of getting volume discounts or advertising credits, etc. Errors over the same can be considered as an entry glitch. When incorrect addresses result in invoices going to the wrong place & slowing down the receivables, errors in the master data, or failure in updating it will delay the payment or any other problems. 

The habit of assumption of the master system will lead to undesirable results if the data accuracy in it is not maintained. Businesses must centralize the master data process and identify roles for accurate management of customer data. With time-to-time auditing of master data, businesses can identify customers with abnormal credit limits, payment terms, and/or discount rates. Documentation and communication of all changes to customer data must be approved by the business’s finance and operations department as they can be a significant impact on cash-flow forecasting. Implementation of controls will help businesses in ensuring data accuracy and permitting read-only access to in-house professionals to ensure override of customer data without appropriate sign-off. 

3. Invoicing/Billing Process

Fair and straightforward billing is always a struggle for businesses. Invoice errors regarding the measure, price, customer accounts, or other inaccurately reflected master data will ensure failure in invoice generation. Inhouse accounting professionals can also make end runs and billing outside the system. Mailed and electronic invoices cause confusion and must be solved by sending accurate invoices on a timely basis. For doing the same organizations can consider the following:

• Automation for reducing time & human error 

• Timely/effective invoice generation & reporting for comprehensive billing on a timely basis and relevant reporting to the end-user 

• Electronic billing systems for EDI/electronic invoices to cut down the delivery time and allowing clients for downloading invoices directly.

• Exception reports for flagging account anomalies over exceeding credit limits and discount rates above company policies

• Customer portal for reducing manual hours to deal with cash applications, disputes, collections, etc. 

Trade spend helps management with an opportunity for optimization of working capital. With significance in the company’s working capital management and cash flow forecasts, standardized processes and controls must be monitored for ensuring invoicing, accruing, and collection/deduction for performing rebates on a timely basis for optimized cash flow and minimized risk. Failure to implementation of strong processes can lead to a loss in revenue and increased write-offs.

Manufacturer rebates require complex calculation and timing for clear definition and communication of company terms and conditions throughout the business for ensuring consistent implementation. With time to time auditing, businesses can also provide key data and metrics related to agreements and opportunities for invoiced and deducted rebates. 

4. Cash Application Process 

While customers paying their bills, and payments coming in, it is essential to apply these both to the specific customer invoices they are related to. From time to time cash application process, businesses can be aware of which are up-to-date and which are outstanding. Impossible to track which customers are paid on which invoices, these processes make smooth late payment follow-ups. Companies that don’t drive these processes waste considerable time and resources in the reissue of invoices and even amendment of reconciliation reports for not reversing incorrect cash applications. To prevent this the following steps are ideal:

• Allocation of payments for specific invoices rather than simply crediting the customer account 

• Application of payments for appropriate invoices

• Application of payments for each account on receiving day for maintenance of system accuracy. 

Varied forms of payments ranging from pre-authorized debit, cheques, wire transactions, electronic funds transfer, or even payment over the phone. Limiting payment methods, customers can use

• Post journal entries prior to system cut-off dates 

• Reconciliation of accounts for quick and consistent follow-ups on unidentified cash receipts 

5. Collection process 

Businesses must take proactive approaches for ensuring the collection of receivables on a timely basis. Effective reporting helps determination of collectible amounts and which are in danger of default. Any failure to adherence to the company’s credit or collection policies worsens the determination of late payments and which will never be credited. Prior to following up on late payments, the accounting team must assure the accuracy of accounts receivable reports with a robust accounting process. Following are the ways for maximizing the collection of accounting process: 

 • Timely and consistent collection efforts with bolstered staff skills over the reluctant customers

 • Negotiation of payment plans as per corporate collection policies

 • Awarding discounts that benefit the company and implemented accurately 

• Strengthening accounts receivable processes for accurate reporting 

• Automation of account receivable processes for the elimination of manual entry errors

Businesses who are planning for reconceiving their accounts receivable operations or just aiming for the improvement of existing policies must have a clear understanding of their current state and assess gap analysis for determination of competitors and the best practices. Businesses can easily identify the steps required for taking close attention to the gaps. 

Rather than just identifying the areas for rectification, OURS GLOBAL’s Accounts Receivable outsourcing services work side by side with your business’s in-house team for skillful implementation of innovative processes and ensure monitoring & tracking of business performance by effective optimization of Accounts Receivable Processes. Ping us right away! 

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