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Credit manager reviewing accounts receivable portfolio analysis

What Is Accounts Receivable Management?

Accounts receivable management, or A/R management, refers to the internal process businesses use to secure and track payments from customers. Specifically, payments owed for products and/or services the customer has already received.

Tracking all steps involving customer payment allows companies to have an idea of how quickly they receive payments and if customers are paying on time (or at all). As a result, businesses gain perspective on how accounts receivable impacts their capital and customer relations — and when course correction is needed.

What is the Goal of Accounts Receivable Management?

The overarching goal of A/R management is to help businesses monitor their financial health so they can correct themselves if they’ve gone off course. Accounts Receivable Management helps with the broader practice of Enterprise Risk Management (ERM). A key component of this is minimizing the amount of customer debt and outstanding invoices.

However, every business has its own unique set of challenges; other goals of successful A/R management include helping businesses in:

  • Solving cash flow issues
  • Measuring profits
  • Obtaining financial transparency and organization
  • Satisfying current (and future) stakeholders
  • Accurately predicting future income
  • Identifying customers who pay late or don’t pay
  • Having favorable lending rates
  • Maintaining a healthy customer satisfaction rate and reputation

Learning How to Manage Accounts Receivable

The first step is understanding what accounts receivable is and its importance; the second is learning how to manage accounts receivable effectively.

Monitor Risk Factors

Being able to identify and monitor risk factors plays a critical role in A/R management. Risks can range from the uncontrollable, like sudden changes in a customer’s credit portfolio, to the controllable, like internal procedures and communication.
Using an AR monitoring service allows businesses to automatically obtain more data and transparency for their credit team. The ability to receive timely notifications about changes in customer credit can help protect businesses from preventable charge-offs and significant loss.

Ensure Data Is Sound

Incomplete or irrelevant data is one of the top challenges credit managers face. Master data is the information businesses keep on their customers, such as addresses, names, and banking information. Duplicate entries, typos, incorrect information, and incomplete information can make collecting invoices difficult or impossible. By standardizing their software and techniques for information collection, businesses can avoid faulty data.

Establish Customer Credit Policies

Each business must determine what level of credit they’re willing to extend to their customers. Having solid rules and policies in place informs sales teams on who they can serve. These same rules will also communicate any specific requirements to potential customers. Credit policies should always spell out the terms covering interest, payment terms, amount of credit extended, and enforcement.

The process for determining credit eligibility should be a thorough one — review credit scores, financial statements, payment history, and even net worth. This will minimize risk by avoiding customers who aren’t credit worthy.

Clarify Payment Terms on Invoices

Communication is key: in as simple language as possible, payment terms should politely tell customers what is expected of them. A/R management teams should articulate what the invoice is for, what payment methods are accepted, the amount of time a customer has to pay, and the consequences of late or missed payments. It’s important to strike the right balance of professionalism and firmness when crafting payment terms. Otherwise, companies risk chasing off potential customers — including those who would have paid on time.

Additionally, when sending out invoices, businesses need to have records on their end as to who is receiving the invoices, what the invoices are for, and what the customers owe. This way, if a customer calls and complains about their invoice, perhaps because the charges are different from what they expect, there is paperwork that either confirms or refutes their claims.

Accounts Receivable Management Mistakes to Avoid

There are plenty of mistakes that can make accounts receivable more difficult than it should be. Common mistakes include:

  • Not following up on invoices in a timely manner
  • Unnecessary complications in the payment process
  • Inadequate communication both internally and with the customer
  • Mistakes on invoices, like not applying payment to the correct balance

In order to hold customers responsible, businesses must first hold their accounts receivable department responsible. By not collecting overdue payments, companies hurt their bottom line. These delays hurt cash flow and can make getting loans more difficult. It’s crucial that companies set clear expectations and procedures for their A/R management teams.

It’s also important to provide them with adequate resources. As a business grows, it needs to scale up its invoice management. When a company gets overwhelmed, payments can slip through the cracks. Getting a handle on processing large numbers of invoices transforms a company’s ability to avoid accounts receivable problems.

If invoices aren’t sent out when they’re supposed to be, customers may forget about payments, move, or otherwise ignore invoices. They may have spent the money on other expenses in the meantime, and now will have difficulty paying on time. This hurts businesses and frustrates customers.

Benefits of Automating Accounts Receivable Management

If they haven’t already, businesses should automate their A/R management processes, which can produce substantial benefits to their accounts receivable process, including consistency and efficiency of the processes.

One way that A/R management protects businesses’ bottom lines is by facilitating a relationship with customers. By making payment simple, such as through an online portal with easy navigation, they encourage customers to pay quickly. Other benefits include the following.

Reduce Errors

While humans are prone to making typos, automated software is not. It’s possible to set up the software to detect and correct human errors, too. This error reduction means more reliable data, which means fewer disputes over charges.

Streamline Billing and Communication

Reducing or eliminating manual processes means less typing, less time reviewing documents, and fewer delays. The software can send emails to customers without human intervention, meaning A/R management teams can automate follow-ups on payments and maintain positive customer relations.

Software with well-designed user portals makes finding the right information easy, and this applies to both accounts receivable employees and customers alike. Having information at everyone’s fingertips reduces the strain on customer support, which means happier employees and happier customers.

Save Time and Money

Less human intervention means employees can spend time on more important tasks. With automated electronic billing and invoicing, companies will rely less on physical mailing — using fewer materials and decreasing expenses.

Close the Gaps in Your A/R Management

Moody’s Analytics Pulse empowers credit departments by notifying them of new customer risks in real time. We also provide resources like our free Business Directory and a self-service application to purchase credit reports on your customers.

Ready to see why Moody’s Analytics Pulse is trusted by some of the biggest companies in the world? Schedule a demo with our credit experts today and find out what we can do for you.