The accounts receivable is an accounting entry that allows for the recording of all customer claims. Effective management of accounts receivable is essential for maintaining a company’s financial health, especially regarding its cash flow. Indeed, accounts receivable represent incoming cash flows expected by the company. Significant delays, particularly due to unpaid invoices, can disrupt this balance and increase the working capital requirement (WCR) substantially. This is why we propose to discover the best practices in managing accounts receivable.
Understanding Accounts Receivable
Accounts receivable include both not yet due invoices, meaning those sent to the customer but whose payment term has not yet expired, and past due invoices, meaning those for which the payment deadline has passed.
Therefore, accounts receivable represent the total amounts owed by customers to the company.
Once invoices are settled, they move from accounts receivable to become part of the revenue.
As a result, accounts receivable have a direct influence on the company’s cash flow level, as it summarizes all incoming flows generated by the company’s activities.
If the accounts receivable increase due to clients extending payment terms or payment delays, it can create significant cash flow discrepancies and, in the most severe cases, lead to a cessation of payments. However, in most cases, these discrepancies result in an increase in the working capital requirement (WCR). And this can prove costly for the company. Indeed, it may need to finance its WCR through short-term loans such as lines of credit or discount financing, which tend to have relatively high interest rates.
To avoid such consequences, a company can adopt the 6 best practices that we will detail shortly.
Establish Clear Payment Terms
The first step in good accounts receivable management is to establish clear payment terms. It is crucial to have a well-defined credit policy that expressly provides for the payment conditions applicable to contracts based on the customer’s profile. These include:
- whether to require a deposit, and if so, the amount;
- the applicable payment deadlines;
- accepted payment methods;
- whether to practice discounting;
- the amount of late payment penalties, if applicable;
- etc.
This information is not only for salespeople, accountants, or collection agents. It must be transparently communicated to clients at the time of contract signing. It is also advisable to reiterate these details on various documents such as quotes and invoices. This prevents numerous disputes related to a misunderstanding of the clauses relating to invoice payments.
Identify and Assess Customer Risks
The customer risk is a reality for all businesses. No company is immune to the risk of a customer defaulting on payment due to insolvency. To reduce the risk of non-payment, it is crucial for a company to identify and assess customer risks.
From the start of the relationship, it is recommended to do some research on the financial health of the client company. For example, if it publishes its financial statements, it is relatively easy to get an idea of the company’s profitability, the state of its assets, etc.
To go even further, one can use the customer scoring method, which involves assigning a score to customers based on the level of risk they represent. Depending on the customer profile, payment terms can therefore be adjusted. For example, a new customer with weak solvency might be given very short payment deadlines, while a loyal customer who has never defaulted could be offered more favorable terms.
This customization of contracts is an excellent way to minimize the risks of non-payment while maximizing business opportunities.
Automate the Billing Process
Among the best practices of accounts receivable, we can include the digitization of accounts receivable, and in particular the automation of the billing process.
Manual billing can be very time-consuming and prone to error. By contrast, an automated billing process allows for the automatic sending of invoices. Therefore, the time taken to send out invoices and, consequently, the time taken to receive payments are both reduced. Time efficiency, reliability, and effectiveness are thus the main advantages of billing process automation.
To benefit from these advantages, it is essential to choose the right billing software or accounting software. Indeed, the solution selected should allow precise tracking of the status of each invoice and provide alerts in case of delay.
To further optimize your billing process, you can:
- document the billing process indicating all the details to include, parameters to provide, tracking to be done, indicators to follow, etc.;
- set up automated reminders before the due date to prevent delays;
- involve sales representatives in the process, as they maintain a privileged relationship with clients and have access to information upfront;
- ensure high-quality customer service to avoid disputes due to dissatisfaction leading to non-payment of invoices.
Monitor Late Payments and Automate Reminders
Another good accounts receivable practice is to conduct monitoring of late payments and automate reminders. Forgotten or misplaced invoices are common reasons for unpaid bills. Indeed, a late invoice does not necessarily indicate financial hardship or a dispute with the client. That’s why it is important to plan personalized reminders at strategic times. It is better to send a reminder early to resolve the issue as soon as possible. However, making telephone or manual email reminders can take a lot of time.
Furthermore, you need to be able to quickly and easily identify overdue invoices and track the actions taken.
Using a debt collection software attached to your billing software is then the ideal solution. You get notified through alerts about overdue invoices and can monitor the progress of each case. Reminders are sent automatically according to the scenarios you have set based on client profiles, balances, etc. Your teams can then focus on the most complex cases.
| Action | Description |
| Identification of delays | Automatic detection of overdue invoices |
| Notifications | Alerts sent to collection managers |
| Automatic reminders | Automatic sending of reminders to clients about their overdue payments |
| Tracking of actions | Recording of measures taken for each overdue invoice |
| Prioritization | Sorting of receivables to be collected by priority based on age and amount |
Analyze and Optimize Accounts Receivable
Finally, managing accounts receivable involves regularly analyzing and optimizing the process. To do this, it is important to monitor the main accounts receivable indicators. These include:
- customer outstanding amounts, or the total amount owed to the company by its customers;
- the average payment period (Days Sales Outstanding – DSO);
- the aged balance to identify the oldest receivables and prioritize collection actions;
- the cash flow forecast to anticipate cash movements.
Analyzing these indicators helps to optimize the accounts receivable management strategy by identifying areas for improvement. For example, if a company notices a high DSO, it might consider shortening payment terms in its sales conditions, check client satisfaction levels and the number of ongoing disputes, or review its collection process to speed up payment of unpaid invoices.
Using a collection platform makes this analysis much easier. Such a solution, like CashOnTime, allows access to dashboards that are updated in real time and customized according to the role.
DISCOVER THE FEATURES OF CASHONTIME
Conclusion
The management of accounts receivable plays a pivotal role in optimizing a company’s cash flow. To effectively control customer claims, several best practices can be adopted:
- establishing clear payment terms;
- automating the billing process;
- identifying and assessing customer risks;
- monitoring late payments and automating reminders;
- analyzing and optimizing accounts receivable.
Have you implemented all these recommendations within your organization? Start now to adopt the best practices of accounts receivable and preserve the financial health of your company.
