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5 Best Practices in Collections for AR Management

     

5 Best Practices in Collections for AR ManagementThe sooner your organization gets paid, the faster you can invest the money you’re paid into growing your business. On the other hand, when customer payments are slow to come in, you may experience significant cash flow problems that can make it much harder to achieve your business objectives.

Ensuring the financial vitality of your organization—and avoiding cash flow problems—starts with optimizing your collections and AR management processes to ensure payments are received as quickly as possible.

While you can’t force your customers to send payments at certain times, you can take some proactive steps to increase the chances you’ll get paid sooner. Let’s take a look at the five best practices that today’s leading AR departments use to prevent cash flow problems from spiraling out of control.

1. Outline Your Firm’s Standard Follow-Up Procedures

In an ideal world, you’d invoice your customers and they’d settle their accounts before they were due every time. Unfortunately, it’s not that easy for every organization. In fact, 60 percent of business owners worry about cash flow problems every month—largely because they’re waiting on late payments.

Because at least some of your customers won’t pay you on time, your AR management policies should include a detailed plan for how your accounting team should follow up on late payments.

For example, maybe your policy will encourage your AR team to email delinquent accounts one week after payment is due—and then again the following week if a check, ACH payment or transfer still hasn’t come in. After sending out two emails without hearing back, the next step is to have someone on your team call the account a month after payment is due to let them know it’s delinquent.

If none of those actions result in your company getting paid, it might be time to escalate the situation to an account manager or someone on the sales team.

2. Review Past-Due Accounts Internally on a Regular Basis

When it comes to collections, the last thing your organization needs is a surprise. Instead of letting late payments catch the AR management team and other executives off guard, your organization should regularly review past-due accounts internally so you can gauge where your receivables stand at any given point in time. Meeting once a month, for example, can help everyone stay on the same page financially.

When you review past-due accounts regularly, nobody should be surprised when you’re dealing with a lot of late payments. Instead, your stakeholders will know when money is tighter than usual and can adjust their strategies accordingly.

3. Create a Process for Disputing Bills and Resolving Issues with Customers

What happens when a customer has a question about their bill? What happens when they believe they were overcharged?

Leading AR teams establish clear processes to follow when customers dispute invoices or have other billing-related issues. That way, accounting professionals know exactly what they are supposed to do when a customer reaches out with a concern. This enables issues to be resolved much faster—which, in turn, helps increase customer satisfaction.

4. Track Benchmarks and KPIs for Continuous Improvement

No matter how good your collections process is, you can almost certainly make it better. The easiest way to continuously optimize collections is by establishing benchmarks, KPIs, and other metrics, and tracking them with an intent of improvement over time.

What kinds of KPIs make sense to measure? Metrics such as days sales outstanding (DSO), average days delinquent, and a collection effectiveness index can be good places to start. But, for true measurement of collections, you should pinpoint metrics such as average days to invoice, past-due balances as a percentage of total outstanding receivables, invoice accuracy, customer complaints, and credit overruns.

Improve those stats over time and you’ll find your cash situation is much more comfortable.

5. Add Automated Accounts Receivable Software to Your Collections Department

If your accounting team is still processing receivables and creating aging reports manually—and crunching numbers by hand to figure out stats such as DSO and average days delinquent—it’s time to move to an automated accounts receivable solution that makes managing AR much easier. Not only will your accountants and AR specialists be able to get more work done in less time; they also won’t have to take care of tedious tasks (for example tracking metrics by hand) or remember when to send invoices and follow up on them, because those tasks will be automatically completed (or prompted) by the software.

With an automated accounts receivable solution in place, AR management becomes a whole lot easier. The software takes care of all the heavy lifting, freeing your accounting team to focus on being customer service agents and completing other revenue-generating activities.

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Jazzy Zhu

About the author

Jazzy Zhu Jazzy Zhu is the Senior Marketing Manager at YayPay, an automated accounts receivable solution that makes AR management fast, easy, and highly predictable. In her role, Jazzy launches lead generation campaigns, implements branding strategies, and supports partner marketing initiatives; she also manages operations and internal processes in support of the YayPay culture and corporate experience. With more than eight years’ experience working with businesses in operations and marketing, Jazzy specializes in helping businesses establish brand presence, analyze and target markets, and implement uptake and engagement strategies. She has a MBA and a MS in Foreign Service from Georgetown University. Read more articles by Jazzy Zhu.

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