Outstanding accounts receivable is a decisive accounting item in a company’s financial management, since it directly affects cash flow, and therefore working capital requirements (WCR). Good cash management is the key to a company’s long-term viability. So how do you manage your outstanding receivables? What are the reflexes and best practices to adopt? Here’s how.
What are outstanding receivables?
Customer receivables, or customer risk, is the total amount owed to the company by its customers. These are the receivables the company holds from its customers. It therefore appears at the bottom of the balance sheet, as a current asset.
Customer receivables include :
- invoices to be issued, i.e. those for which commercial operations have been finalized, but for which the invoice is still to be issued;
- invoices not yet due: these are invoices that have not yet reached the payment deadline. They are therefore invoices that are due but not overdue;
- overdue invoices, which are invoices issued after the agreed payment deadline. These are invoices that are overdue.
This comprehensive item has a number of strategic implications for the company. On the one hand, it is an effective lever for building long-term business relationships by granting payment terms to customers, especially the most loyal. On the other hand, the company must control its customer risk to avoid excessive cash shortfalls that could jeopardize its ability to pay its suppliers.
How do you calculate outstanding receivables?
There are two steps to calculating outstanding receivables:
- the sum of invoices issued, due and not due ;
- subtracting advances and deposits already paid by customers.
The formula for calculating trade receivables is therefore as follows:
Outstanding customer accounts = (invoices issued + invoices overdue + invoices not overdue) – (advances + deposits).
How do you assess customer risk?
Before attempting to manage outstanding receivables, it is essential to assess the risk they represent. In fact, depending on your receivables management policy, payment terms can be relatively short. As a result, the risk of non-payment is reduced, as is the risk of cash shortfalls. Your WCR is also reduced.
However, in addition to a clear customer receivables management policy that is relevant to the company’s business, there is an effective way of assessing customer risk. It’s called scoring.
Using this credit management method, you assign a score to each of your customers according to their risk profile. The higher the score, the more likely the customer is to benefit from payment facilities. On the other hand, if a customer’s profile is considered risky, he or she should pay on account, in cash, etc.
Scoring enables you to assess the risk represented by outstanding receivables in detail for each customer.
How do you manage outstanding receivables?
The aim of receivables management is not only to limit late payments, but also to reduce customer disputes.
To optimize the management of your outstanding receivables, here are 8 best practices to adopt:
- perform an audit ;
- regularly monitor customer risk ;
- define a collection procedure ;
- update the general terms and conditions of sale ;
- involve teams ;
- outsource the management of outstanding receivables ;
- appoint a credit manager ;
- equip yourself with an effective credit management tool.
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1 – Performing an audit
To get an overview of the situation, we recommend starting with an audit of your receivables management policy. This includes payment rules, pre-collection processes and collection procedures.
In addition, you will analyze the composition of outstanding receivables: what types of invoices are there? Are there any overdue invoices? Who are the customers in arrears? etc.
In this way, you’ll be able to identify the areas for improvement you need to work on in order to gain greater control over outstanding receivables.
2 – Regular monitoring of customer risk
If the audit is carried out over a given period of time, the follow-up must be carried out on a regular basis. For example, weekly and/or monthly.
This enables you to anticipate potential disputes, and to be responsive to customer reminders when necessary.
3 – Define your collection procedure
Because it’s impossible to eliminate all risk of non-payment in a company, it’s essential to put in place an effective collection procedure.
Employees in charge of reminders and litigation procedures must know how to :
- at what pace to carry out the various reminders;
- in what format (e-mail, simple or registered mail, telephone reminder) ;
- the rules applicable to each customer according to their profile.
4 – Update general sales conditions
The company’s General Terms and Conditions of Sale (GTCS) determine the rules applicable to both customers and the company. It is therefore essential to keep them up to date, to ensure that they are always in line with the company’s outstanding receivables management policy, and that payment terms and conditions are consistent with it.
In addition, internal teams need to be aware of the best practices to adopt when drawing up contracts. This applies in particular to the payment terms granted and the means of payment available, depending on the customer’s score, as well as the negotiation margins available.
5 – Involving teams
Managing outstanding receivables is not just a matter for the Chief Financial Officer (CFO) or the collections team, it’s also a key issue for sales teams.
All those involved in customer relations (sales team, after-sales service), and all those involved in the payment and billing follow-up process, need to be made aware of this issue. A genuine cash culture needs to be established within the company.
6 – Outsource management of outstanding receivables
To control your outstanding receivables and limit the risk of non-payment, you can turn to factoring.
This involves outsourcing all or part of your outstanding receivables to a company specialized in short-term financing. This company advances you the amount of the invoices and manages any collection procedures, in return for a commission of between 5% and 25% of the amount of the invoices entrusted to it.
Factoring can therefore represent a significant cost for the company.
7 – Appoint a credit manager
Having a credit manager within the company acts as a link between the CFO and the sales and accounting teams. The credit manager defines and monitors the entire process, from contract negotiation and scoring rules to formal notices of default.
In addition, he/she ensures very regular monitoring thanks to the dashboards he/she draws up.
8 – Equip yourself with a credit management tool
Last but not least, a credit management tool is a real asset when it comes to controlling your outstanding receivables.
This type of software enables you not only to monitor outstanding receivables in real time, but also to implement comprehensive processes. You can create workflows that are triggered according to the scenarios you have devised.
This is what the CashOnTime solution offers you. Thanks to its Collection service (monitoring outstanding receivables, payment deadlines, risk assessment), teams save a great deal of time and can concentrate on the most complex dossiers, while the credit manager can steer by data.
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