The Next Big Improvement in Accounts Receivable? We've got three.

George Green
Three improvements in accounts receivable to reduce risk and control cash flow

Three improvements an accounts receivable professional can focus on to manage any economic uncertainty that extends into 2022.

The accounts receivable department has experienced a turbulent couple of years, to say the least. It’s not easy being the team responsible for ensuring that payment is received for goods and services at a time when customers are doing their very best to cling on to cash.

But can you blame them? Well, if you’re an accounts receivable professional who is seeing payments become increasingly overdue, it can be hard not to. However, the impact of the pandemic is still very real. A recent UK study revealed that out of 500 businesses seeking repayment plans, 83% had asked for even more time to repay emergency Covid loans.

 

piggy bank with a mask on83% of UK businesses have asked for more time to repay Covid loans

There’s also the news of the Omicron variant. Right now, there’s little known about the impact the new strain of COVID-19 will have. However, experts are suggesting that if the situation were to worsen, governments could be forced to impose tighter restrictions that would damage demand for goods and services. This could lead to a sharp fall in economic activity, similar to the earliest phase of the pandemic. There’s also the worry of what’s next and the problems potential other variants could cause. The impact on AR teams? Company sales could decrease and once again, it would become difficult to collect on invoices.

In short, we are not out of the woods yet. Liquidity will continue to be an issue for many organizations and accounts receivable teams need to prime themselves for another challenging year. Let’s explore three improvements an accounts receivable professional can focus on to mitigate risk and better control cash flow.

Become an Expert on Aging Reports

Reviewing aging reports daily helps AR professionals see where balances lie and keeps them close to everything that’s going on with customers’ payments.

They also provide insight into where your cash sits in as an aggregate, as well as the percentage spread between aging buckets. They show the customers that have growing balances and those that have multiple unpaid invoices, which is useful as that may indicate a problem. They also help highlight unaccounted balances where a single invoice may have been missed.

Slicing and dicing an aging report is an essential task to segment customers into risk strategies. However, managing this manually can be time-consuming. Taking this approach, AR professionals must download aging data from their accounting software or ERP and spend time analyzing it to identify trends. Once this is complete, the aging report can then be shared with those who need to see it — usually in Excel format.

aging report

Slicing and dicing an aging report is essential to segment customers into risk strategies

This process is not only long and drawn out, but it’s also not real-time, which means that the data captured is often not completely up-to-date. Thankfully, AR platforms now capture real-time aging reports, providing a live, current status of receivables. This frees accounting teams to focus on core revenue-collecting activities.

Measure the Effectiveness of your Collections

Do you know your Collections Effectiveness Index or CEI? This is a calculation of your company’s ability to retrieve accounts receivable from customers. In other words, CEI compares the amount that was collected in a given time period to the number of receivables available for collection.

Since this calculation is the percentage of invoices paid in a given period, 100% is the perfect score, 80% or above indicates a highly effective collections process, while 50% or below is considered low. YayPay’s Collections Effectiveness Index calculator can be used to instantly determine this number.

To improve it, teams must examine multiple areas of their accounts receivable process, including:

  • Credit Policy - This is how a company determines creditworthiness, as well as the terms and conditions for making sales. Companies should be able to understand a customer’s eligibility to obtain funds based on the health of their own business. This can be found out through purchasing aging reports from third-party vendors and checking references (e.g. bank references). 
  • Collections - A clear and effective process for sending and following up on invoices is essential. If customers are contacted late, this will lead to delayed payments. Automating collections ensures that this process is systematic, providing a consistent process for customers which enables invoices to be processed and paid for on time.
  • Data Management - Human error can have a big impact on how quickly payments are collected. Delays can be caused if customer details are incorrect, such as what money is owed or even contact information. Today, AR teams are using platforms to centralize data and ensure it is always up-to-date, which frees them to focus on cash collection.
  • Payment Options - Today’s customers want to pay you in the same way that they pay for everything else online. Using AR automation, you can offer customers all the payment options they want and need, which improves their experience and helps you get paid faster.

more cash

A CEI score of 80% or above indicates a highly effective collections process. Do you know yours?

Diversify your Approach

All customers are different. And that means you need to personalize the approach you use with them if you want your accounts receivable to be effective.

Collections

Workflows should be customized by customer type. This may mean increasing touchpoints and speeding up escalation for risky accounts. On the other hand, customers that pay on time can receive a “white glove” service with friendly reminders and a personal phone call before invoices are past due. Using the same “one-size-fits-all” approach for customers won’t help address issues in payment behavior. Even if the regularity of follow-ups is increased, there is no guarantee that collections will improve.

Our Ultimate AR Email Template Kit contains over 20 customer-friendly emails for every AR touchpoint. Using this, you can optimize your collections workflow by ensuring that your customers receive engaging and informative communications at every step of the process. This helps encourage positive payment behavior.

If you want to learn more about effective customer communications, you can read our eight best practices here.

Payments

If a tailored collections approach isn’t getting your customers to pay on time, they may be facing cash flow challenges. In this instance, you may have a past-due client who informs you that they need an extension to settle their bill.

To manage this, you could switch up your approach by offering the client a payment plan for their outstanding balance. Studies show that 78% of customers are more likely to bring you repeat business after a positive experience with payment plans. Who says it doesn’t pay to be nice?

Another effective method is offering an early payment discount. For example, you can offer a 2/10, net/30 discount, meaning customers receive a 2% discount if they pay within 10 days instead of 30. Where a business can afford it, offering early payment is important and can be very helpful in boosting cash flow.

High-Performance AR is on the Horizon

No matter what goes on outside of your business, implementing the improvements above will bolster your AR department and place your team in a stronger position to manage any economic uncertainty that extends into 2022.

If you are interested in automating these accounts receivable tasks to increase the effectiveness of your team, contact us today.

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