Managing accounts receivable (AR) is very important for a company's financial health. It's more than just tracking who owes what—it's about ensuring smooth cash flow, minimizing risks, and maintaining strong customer relationships. In the U.S., AR accounts for approximately 1.5% of a company's total assets. A 2020 survey revealed that nearly all businesses experienced delayed payments.
Effective AR management involves setting clear payment terms, being fair, and closely monitoring the numbers to prevent financial issues. Companies that excel in AR management often get paid about 20% faster than others, highlighting the importance of accounts receivable best practices. Let’s explore top strategies for improving your AR management, from establishing clear credit policies to proactive collection efforts.
Accounts receivable, or AR, is the money that people owe to a business because they bought things on credit and haven't paid back yet. It's a part of what's called working capital management. On the balance sheet, which is like a snapshot of what a company owns and owes, AR is listed as something valuable because it's money that will be received soon (Brealey, Myers, & Allen, 2011).
Accounts receivable best practices are the smart ways a business can handle the credit it gives to customers. Good practices help make sure customers pay on time and reduce the chance that they won't pay at all. The Chartered Institute of Management Accountants (CIMA) believes that being good at managing AR is key to keeping a business's cash flow and making the most of the money it has (CIMA, 2013).
The process of monitoring and managing customer payments is a step-by-step method that begins with the sending out of accurate invoices immediately after the sale or provision of services. The Federal Trade Commission (FTC) outlines guidelines for billing accuracy (FTC, 2000), emphasizing the need for clarity in billing statements to prevent confusion and disputes.
Companies often use tech systems to track payments and aging of receivables, with software such as QuickBooks providing integrated solutions for small businesses (Intuit, 2021). Follow-up actions for late payments are told by tracking tools, with best practices suggesting regular customer contact and interaction to maintain positive relationships and help prompt payments (Alexander, Britton, & Jorissen, 2007).
AR management's key components include:
The goals or objectives of AR management are:
To help with these goals, it's good to have credit rules. This means the company decides who can pay later, how much they can spend, and when they need to pay back. These rules are part of what's called a credit policy. The policy helps the company make smart choices about who to trust with paying later. This way, the company tries to make sure it doesn't lose money from customers who don't pay.
A report from the National Federation of Independent Business, or NFIB, said that for small businesses, selling things on credit can bring in a lot of money. So, taking care of AR is a big deal (NFIB, 2019).
If a company does a good job with AR, letting customers pay later can actually help sell more stuff because it makes it easier for customers to buy things. But if a company isn't careful with AR, it might end up not having enough cash. This can make it hard for the company to pay its bills or spend money on things that help it grow (Ross, Westerfield, & Jordan, 2010)
Following good methods for managing accounts receivable helps a company collect money more effectively. This is really important because it keeps the cash coming in regularly, showing that the company is financially healthy. Aberdeen Group a marketing research company found that companies that are really good at managing AR also have better cash flow (Aberdeen Group, 2012).
Doing AR well isn't just about getting money on time; it also makes customers happy. When the process is clear and professional, customers trust the company more. This can lead to customers sticking with the company for a long time because they like how they are treated when it comes to paying their bills (Peavler, 2019).
Having a strong system to manage accounts receivable helps to cut down on mistakes and arguments. These problems usually happen when bills are wrong or it's not clear when the customer should pay. The American Accounting Association (AAA) says that having correct accounting records is very important for making sure financial statements are trustworthy (AAA, 2009).
To make sure their financial reports are right, businesses need to check their work carefully and follow good procedures. This is very important for making smart business decisions and for following the rules for financial reporting, which are made by the Financial Accounting Standards Board (FASB, 2014).
In this part, we'll talk about the need for good rules on credit and collecting money, a key part of accounts receivable best practices. These rules help avoid money loss by choosing customers who can pay later wisely.
We'll explain why these rules protect a company's money and help predict when money comes in, which businesses need to keep running.
Having good rules for when to let customers buy things on credit and how they should pay back is very important when dealing with accounts receivable to avoid losing money from customers not paying.
These rules help decide if a customer can be trusted to pay later. They look at how stable the customer's money situation is and if they have paid on time before. This helps a business decide safely if they should let the customer pay later, which keeps the business's money safe.
Also, when the rules are clear, a business can spot early if a customer might not pay. That way, they can do something about it quickly and lower the chance of not getting the money they are owed.
Having a good credit policy and setting up clear payment guidelines are important for maintaining a business's financial health. Here's how:
To keep things the same when giving credit and dealing with payments, it's really important to write down how everything should be done. This should tell you how to check if a customer can be trusted with credit, how to decide how much credit they can get, and what to do if they pay late or don't pay at all.
It's also a good idea to use the same forms for everyone who asks for credit. Teaching the people who give out credit often and checking the rules now and then will help make sure everything works well and stays the same.
When giving credit to customers, you should have clear rules. These rules should explain how to decide if someone can get credit by looking at their money situation, their past with paying bills, and their credit score. They should also set the maximum amount of credit you can give, when payments should be made, extra time you might allow for payments, and what happens if someone pays late.
The rules should also include how to take payments and what to do if there's a problem, like if a customer doesn't agree with their bill. If there's a really tough problem, like someone not paying at all, the rules should say what steps to take, which might include getting help from a company that collects debts.
This part focuses on embracing electronic billing and online payments as part of accounts receivable best practices. We'll discuss the transition from paper to digital methods, highlighting cost savings and efficiency gains.
We will also look at how bringing together billing and payment systems can make it easier to keep an eye on unpaid bills and help money come in faster. Using these online methods is very important for today's companies that want to make their money management better.
Switching to electronic invoices instead of using paper is a good idea for any business. When you use electronic invoicing, you save money because you don't need to buy paper, ink, or pay for sending letters through the mail. It's also easier to fix mistakes on an electronic invoice because you can just change it quickly on the computer.
Electronic invoices are safer too. They use special codes to keep your information private and they keep your records safe in the computer system. If you start using electronic invoicing, your billing work will be faster, you'll make fewer mistakes, and it's better for the planet because you're using less paper.
When you combine your billing and payment systems, it's really good for keeping track of money that people owe you. This is because everything works together smoothly. Integrated systems can handle making bills, checking if they're okay, and taking care of payments. This means things get done faster and there's less waiting for money to come in.
People at your business don't have to spend so much time on billing, so they can do other important work instead. Also, when everything uses the same kind of data, it's easier to see if the money coming in matches the bills you sent out.
Your financial reports will be right more often, and managing your business's money gets easier. In short, putting billing and payment together makes your business work better and adjust faster to what you need.
Invoicing software that comes with payment processing built in is very important for handling the money that customers owe you well. This kind of software lets you make bills and send them over the internet, and a lot of what used to take a lot of steps is now done by the computer. When customers can pay their bills right inside the software, everything gets easier and quicker.
Money comes in faster, you have more cash available, and you don't have to work as hard on billing tasks. Also, because this software shows you financial information right away, you can understand better what's going on with your money and take care of your accounts receivable much better.
This section talks about why it's good to watch your invoices closely and how it helps you get paid on time. We're going to look at easy ways to keep track of your bills and remind people to pay what they owe. We'll also talk about how using accounting software can make keeping an eye on your money much easier and can help you notice if something doesn't add up right away.
Keeping track of invoices is important to make sure you get paid on time. This helps your business have enough money to keep running smoothly. One way to help get paid quickly is to remind your customers that a payment is due soon. Doing this in a friendly way can make your customers more likely to pay on time.
If a payment is late, you can send another reminder by email. Make sure the email subject is clear and catches their eye. Think about how old the invoice is and what you know about the customer when deciding how to remind them.
It's also a good idea to check your bank statements to see if the payments have come in. This is called reconciling. It's a way to make sure you got paid the right amount and that you wrote it down correctly. If you find any mistakes or something that doesn't match, you can fix it right away.
Accounting software helps a lot with keeping track of invoices. It can make sure money flows into your business better, give you useful information, and make your customers happier.
With the help of accounting software, you can make and send invoices from anywhere, any time. That means you can get paid faster. The software shows you which invoices haven't been paid yet, how much money you should be getting, and how much profit you're making. This helps you make smart choices for your business.
When customers can pay online through the software, they usually like it more because it's easy and convenient. Picking the right software is important because it can lower the chance of making mistakes, do some of your work for you, and give you access to all the important numbers and information you need.
Here we talk about simple ways to get paid on time and keep track of money that's still owed to you. We'll look at easy methods like setting up payments to happen by themselves and making sure you know which bills need to be paid first.
You'll also learn how to remind people they need to pay and what to do if they forget. Using these accounts receivable best practices will help you keep your money in order and avoid problems with unpaid bills.
A proactive payment collection strategy involves taking steps to ensure payments are made on time and reducing the risk of bad debts. Here's a strategy for making sure you get paid on time and avoid losing money because of unpaid bills:
Following up on outstanding balances is crucial for maintaining healthy cash flow.
Here are some recovery follow-up methods :
The aim of following up right on time when enforcing payment policies is to make sure people pay when they're supposed to. Doing this helps keep the money flowing into the business and also helps keep good relationships with customers. By watching how and when customers pay and setting up warnings for when they pay late, you can quickly step in if there's a problem.
If you talk to the sales team and keep up with news about the company, you might find out if the customer is having money troubles. Being ahead of the game and knowing what's going on can help stop situations where you don't get paid and make the process of getting money smoother.
In this part, we will talk about how to use automation tools in the accounts receivable (AR) process. These tools help us see how much money we expect to come in, make billing and collecting money easier, and speed up communication and financial tasks. Automating these tasks can make things run smoother, reduce mistakes, and make it faster to handle cash through payments.
We will also look at which AR tasks can be automated, like making invoices and matching payments, and check out different software options.
When a business sells something, it often doesn't get paid right away. Instead, the business waits for the customer to pay later, and knowing when that money will come in is very important for the business to manage its own money.
Using AR automation and software helps businesses know when they will get their money in a much faster and more accurate way. This is because automation can do things like create bills for customers and send them out without a person having to do it all by hand. It can also keep an eye on when payments are made.
When AR is automated, the business can see at any moment how much money is supposed to come in and when. This helps the business make good choices about using its money because it has better information about when money will be coming in.
When a business uses automation for its account communications and processes in AR, it gets a lot of benefits:
Some tasks in the AR process that can be automated are:
There are different software solutions for these tasks:
For this part, we're going to talk about how to fix disputes with payments fast and before they get worse. It's smart to know the usual troubles, like when people say they didn't get what they bought or want their money back. Then you can stop these problems early. This keeps customers happy, stops people from saying bad things about your store, and keeps you out of legal trouble.
Taking care of customer problems before they get big is really important. When you know what kind of problems usually happen, like when customers say they didn't get what they paid for or they want their money back, you can do things to stop these disputes from happening.
This is good for your business because it keeps customers happy, stops bad talk about your business, and keeps you away from trouble with the law. When you handle things before they get out of hand, customers will trust you more and want to keep buying from you.
To find quick resolutions for payment disputes, businesses should:
Let's talk about how having different and easy ways for customers to pay can help solve their problems with paying, make them happier, and increase how much we sell. We will check out ways to make paying easier, like using payment systems that work in many ways and making sure it's easy to pay on phones.
Also, we'll talk about common ways to pay, like credit cards, digital wallets, and services that let you buy something now and pay for it later. We'll explain why these options are good for attracting lots of different customers.
Having different ways for customers to pay can really help with payment problems. When a business lets customers pay in the way they like best, customers are happier and might pay faster. If you can pay with a credit card, a mobile app, or even in installments, you're more likely to buy something and not change your mind at the last minute.
This is good for businesses because they sell more and people are less likely to stop buying something before paying. Also, if a business accepts many payment methods, they can sell to more people in different places, which is great for growing the business and staying competitive.
To simplify the payment process for customers, businesses can:
Standard payment options that businesses commonly offer include:
In this part, we're going to talk about why it's really important for different teams in a company to work together when managing accounts receivable. It's not just the job of the money accounting team to make sure the company gets paid; every group has an important role.
From the time we make a sale to when we get the payment, each team's ideas and talks with customers can help get money faster, make things run smoother, and make the company's money situation better.
Involving different departments in the cash collection strategy is important for the overall efficiency of the accounts receivable (AR) management process. Think of it like this:
When everyone works together, they can come up with smart ways to make sure the company gets paid faster and easier.
Training staff for accounts receivable (AR) best practices is very important for a business. AR is about managing the money that customers owe to the company. When staff are well-trained, they know how to do their jobs well. They understand why their work matters and how it helps the business stay strong financially.
Giving regular training to staff does several good things:
To wrap things up, it's really important for any business to know these accounts receivable best practices—that's the money customers owe after buying something but haven't paid yet. Simple things like having clear rules for when and how customers should pay, sending bills online, and giving lots of different ways to pay can make a big difference.
Sometimes, though, even when you do everything right, some customers might take a long time to pay or not pay at all. That's where South District Group (SDG) comes in. SDG is really good at dealing with late payments in a way that's fair and follows the rules. They can help businesses like yours make sure you get the money you're owed while still treating your customers nicely.
Is dealing with late payments making it hard for you to focus on your business? Reach out to SDG. We're here to help you get your money in a way that's easy and fair, so you can keep your business running strong. Let's talk, and we'll show you how we can help keep your cash flowing and your customers coming back.