How to optimize and transform your accounts receivable process?

What can be more important for a business regardless of its scale or size than to ensure a smooth inflow of funds? However, in spite of the obvious pitfalls of not doing so, most companies choose to focus more on pushing sales or marketing rather than tightening up accounts receivable.

Improving and streamlining the accounts receivable process brings many benefits to businesses not just to accounts and bookkeeping but also to overall functioning as a ripple effect.

It thus makes good business sense to maximize accounts receivable and streamline the process. You stop leakage of capital while increasing liquidity. Enhanced inflow of funds helps to reduce cost of funds, lowers debt and does away with the need for extra borrowings to meet working capital requirements. In short, improving accounts receivable efficiencies increases liquidity in the business and resulting in swift growth, development and expansion and diversification.

Since accounts receivable is so crucial, it is advisable that the process of streamlining its functions start early for any business. At the beginning of each sale to a customer, the payment terms must be discussed and put down on paper. Get a client on board and initiate electronic payment and you can be sure that you will not have to bother about collection of dues. Instead, too many businesses concentrate on sales instead of realizing its proceeds.

Some of the typical issues that crop up due to inadequate monitoring of accounts receivable are continuous extension of credit to defaulters of the past or to those who have bad payment records. Others include failing to check the accuracy of the invoices and not monitoring reports to quickly zero in on potential problematic clients. Letting things lie and putting accounts receivable on the backburner will only make controlling the affairs of the company and its liquidity position that much more difficult.

When you start to optimize the accounts receivable process of your company, it might seem to be a daunting task. But if you go about it methodically, you should be able to quickly achieve your objectives.

Here are five steps that you should follow to better your accounts receivable process.

  • Structure an accurate customer database This is the key to optimizing accounts receivable. Wrong addresses on invoices leads to customers getting them late or not getting them at all resulting in late payments. The database should be closely monitored periodically to find customers that have been given inappropriate payment terms, credit limits and discounts. Any changes to the database should be done by authorized personnel only and access to it should be limited.
  • Clear and well-documented credit appraisal policy – Too many times businesses in their zeal to increase sales do not evaluate the worth of the customer to whom credit is being allowed. A clear policy for extending credit should be formulated and any deviation should be made in exceptional circumstances only. Points to focus on should be issuing instructions on how to evaluate credit limits and their regular review based on track record of payments made and volumes of orders placed.
  • Have an efficient billing process in place – Bills and invoices drawn should be accurate and error-free especially for pricing and units of measure. Litigation caused due to inaccurate billing with the customer can drag on for years. Further, you have to ensure that the invoices are dispatched in a timely manner so that the customer receives it well before the due date. However, this can be a long drawn and tedious procedure if done manually so it is advisable to automate the process through installation of cutting edge accounts software. Or you can even outsource this work to leading agencies in this field.
  • Streamline the collection process – If the data entry is accurate and drawing up of invoices is error free in all respects, it becomes that much easy to effectively initiate a proper and timely collection schedule. When accounts are closely monitored it is possible to detect early which accounts are at risk of going into default. Quick intervention can then be made to bring those accounts back to order through close negotiations with the customer without compromising with the overall credit policy of the company. This can be made possible if the accounts receivable process is automated.
  • Quicken the outstanding closure process – Once the payment is received, it should be applied to the corresponding outstanding due and the account closed quickly. If it is delayed wrong posting and unwarranted litigation becomes a distinct possibility. Further, you will know at once which accounts are current, which are due and which needs to be followed up. If you receive cash, do not dump it in sundries to be adjusted later. Sooner than later, you will lose track of which accounts should have been closed from cash received.

Once these processes have been implemented you should adopt best practices to improve the accounts receivable process. As per the American Productivity and Quality Center, a set of standards called Open Standards may be implemented that outlines best practices for accounts receivable processing. Here are a few of them that you will do well to follow.

  • Implement an effective credit management policy – Do not extend credit limits to poor quality customers just to keep sales moving along. This can backfire in the long run through piled up dues that you will find hard to collect. Establish a specific process for handling disputes so that your staff knows how to deal with defaulters if the situation arises. You can also try shortening the credit term for slow paying customers. This will force them to act a bit more quickly than usual.
  • Offer choice of payment options – Offer your customers a wide choice of payment methods or discuss what suits them the most. This will make it easier for customers to make payment on time.
  • Establish a proactive collection policy – Make collections one of the top priorities of your business and initiate a clear collection plan. Monitor the process closely and intervene just when due date draws near. If an account becomes overdue, your staff should immediately set the recovery process in motion.
  • Automate systems – The human element should be reduced as much as possible. Electronic billing ensures speed and accuracy and automation makes sure that you have reports on hand to closely monitor the accounts receivable process.

It is thus seen that to streamline the accounts receivable functions in your business, a drastic overhaul of the bookkeeping system is not necessary. A few changes in implementing processes, automation and tight controls and in-depth monitoring of accounts receivable is all that is needed.

Avneet Narang brings more than 10 years of experience in digital marketing, branding, advertising and public relations to her role as a Marketing Manager at Cogneesol, a well-recognized company providing accounting services to businesses worldwide.