Effective Techniques to Improve Accounts Receivable Collection

Are you looking for a reliable outsourcing service to improve your business’s collection of accounts receivable (AR)? Even if you have steady sales and growth, continual cash flow issues due to a lack of AR management can negatively impact your company’s growth.

Cash flow, after all, is what keeps a company running. And continuous cash flow allows you to keep expanding, upgrading your company’s technology, and creating different revenue streams. On the other hand, poor AR management can lead to wasted staff time, accounting errors, lost revenue, and poor cash flow.

In this post, you will learn effective strategies to improve your business’s accounts receivable management and make payment collection more efficient.

Improve Your Company’s Accounts Receivable Collection

Accounts receivable is any money or payment your clients owe for goods and/or services they have purchased on credit. Overdue invoices can be a costly and tedious problem for your business. Therefore, AR management follows certain processes to track that money. These include:

• Invoicing and billing.
• Payment processing.
• Internal communication and process.
• Communication with clients.
• Collection process and credit policies.

The main objective of accounts receivable management is to optimize the process of billing, payments, and collection to minimize your days sales outstanding (DSO) and processing costs, all while maintaining good customer relations and reducing the risk of bad debts. Accounts receivable are often the biggest current asset on your balance sheet.

Here, we will learn about techniques to improve your company’s accounts receivable (AR) and cash flow.

1. Create an AR Aging Report

If you want to improve your AR collection, you first have to take control of your collections efforts. This will help determine the current payment status of all your accounts receivable.

You can do this by creating an accounts receivable aging report. This report will help you keep track of all your overdue invoices and payments from a specific time period. This report can also be used to measure the financial health of your company and customers.

The report includes information about the amount of debt owed and is segregated into groups according to the number of days since the invoice was issued. The groups can be categorized as:

• 0-30 days
• 31-60 days
• 61-90 days
• More than 90 days.

If this report is updated and reviewed regularly, it can help to address any potential problems before the bill becomes past due. It will also help you decide on the type of action that needs to be taken with each customer, depending on how late they are.

2. Be Proactive in Your Invoicing and Collection Efforts.

Another important step to ensure you are receiving timely payments is to make sure that all your clients are aware of their payment deadlines, due amounts, and payment methods. Usually, these conversations are held during client onboarding. But if you have updated your AR collection process or your client is continuously overdue, convey this information.

You can employ a few methods to make your AR collection easier, such as:

• Automating your invoicing: Automated invoicing saves you time and money; reduces human error; bills your customers instantly; and takes care of the entire invoicing process, from creation to payment reconciliation. It also tracks your incoming payments to gain visibility into your cash flow—all while offering your payers a transparent process.
• Creating good invoices: Create effective invoices with all the relevant information (i.e., due dates and amount due) and a professional appearance. By sending them early, your collections will be greatly improved.
• Evaluating your data: Good data supports good collections. So, implement a system for evaluating your customers’ contact information. Check and verify them, and regularly eliminate all duplicate records before they have a chance to undermine your collections.
• Categorizing your customers: You can also categorize your customers to develop individual collection strategies for each group based on their size and payment behaviour.

For example, big clients may require high-touch customer service with the accounting team, while smaller customers could be dealt with via online service portals to resolve simple problems. You can also take extra measures for late payers so they have to pay upfront before they can avail themselves of further services. In this way you will be able to avoid any kind of bad debt. You can also take a hybrid approach of automation and customization.

3. Offer a Payment Incentive

Offering an early payment incentive is probably the most effective way to get paid quickly. Early payment discounts encourage clients to pay invoices before their due date. These discounts generally come in the form of a 2/10 net 30 discount. This means the buyer will receive a 2% discount on the net amount if they make the complete invoice payment within the first 10 days of the invoice date. Otherwise, the total amount is due in 30 days.

The amount of the discount varies by industry and can be very encouraging and effective for customers working within a tight budget. If you can afford them, offer these kinds of early payment discounts to boost your cash flow.

4. Make It Easy for Customers.

Most payments get delayed because customers face issues during the payment procedure or because they don’t have access to a quick and convenient payment method. To maximize your cash flow, make the payment process as easy as possible. Whether through traditional or electronic payments, the easier you make it for customers, the faster you will get paid.

You can eliminate these issues by taking a few precautionary steps, like:

• Using an electronic invoicing system that distributes invoice information and links right within an email. It will also prevent the email from getting caught in spam filters.
• Setting up simple and safe digital payment portals that allow customers to pay your invoices online as soon as they get them.
• Accepting more payment methods (like wire transfers, credit cards, traditional cheques, and PayPal) preferred by customers. This will allow your business to be flexible and receive client funds faster.

5. Outsource Accounts Receivable

Finally, outsource your accounts receivable. Especially if you run a small business, you already have tons of work, from production to marketing and sales, which is more important to running the business.

AR outsourcing is more cost effective than investing in an in-house team. This dedicated team of professionals, with their experience, knowledge, and access to the latest accounting software, can ensure a smoother, more error-free AR process. It will also help improve your billing and payment processes.

Accounts receivable collection is a complicated but indispensable process for your business. You can employ the above-mentioned techniques to minimize the number of due payments and ensure maximum collection of debts without alienating your customers. To get further information regarding accounts receivable, data entry outsourcing, or other tasks relating to accounting & bookkeeping, contact Virtuous Bookkeeping today!