When it comes to mastering accounts receivable management, you will get a crucial perspective on earning steady revenue and ensuring the efficient cash flow for your business purposes.

At the same time, efficient processes will lead to timely payments and better client relationships due to high liquidity. On the other hand, you should remember that neglecting AR management can lead to wasting resources, lost revenue, accounting mistakes and bad cash flow.

That is why you should stay with us to learn a few things on How an Increase in Accounts Receivable Affects Cash Flow, which will help you throughout the process. Let us start from the beginning.

Things to Know About Accounts Receivable Management

It is important to remember that account receivable is any money that your client owes to your business.

We are talking about implementation of various processes and system that will help you track the money you are owed by others including billing and invoicing, communication with clients, payment processing, internal communication and processes, credit policies and collection processes.

As you can see the account receivable staff will work closely with finance and sales team, meaning they will responsible for recording transactions, collecting revenue, resolving discrepancies, verifying payments and dealing with accounts by following certain factors.

The primary idea of effective account receivable management is to optimize your payments, billing and collection processes with an idea to reduce the time required for getting paid and eliminate the risk of bad debt that may happen to numerous businesses across the globe.

Another important consideration is that receivable management features creating following practices and standards for your business that will facilitate efficient payment and billing for your clients.

You should click here to learn more about account receivable management. We are talking about getting paid on time and avoiding late payments, which is a common situation that happens to most businesses.

Tips for Improving Account Receivable Management

After understanding the definition and perspective, the next step is understanding the tips that will help you improve overall management and make relevant collection efficient and effortless in the long run.

1.    Online Payments and Electronic Billing System

You should remember that snail-mail billing and paper-based options such as checks are outdated and inefficient. They are simple to lose and generally time-consuming to track throughout the process. Instead, we recommend you to switch to an electronic invoicing system that will track pending payments and let clients make online payment.

By integrating payments and billing, you will automate the record-keeping processes, which will provide you a peace of mind and decrease the chances for human error. We recommend you to use invoicing software that already features integrated payment processing, so clients can click from their bill to initiate payment as soon as possible.

At the same time, the system will automatically record payment for you in form of cash application, which is vital to remember. This is also important factor for systematic and customized follow-up, especially in case of late payments. Your business can stay on top regarding collecting payments, while communications will be tailored to each customer.

2.    Use Proper KPIs

If you wish to ensure that your accounts receivable processes are properly functioning, we recommend you to keep track of AR performance metrics, which are important along the way.

• DSO or Days Sales Outstanding – You should know that this particular metric will help you optimize your process with an idea to reach the desired reduction. We are talking about the average amount of time you need to collect a specific payment. The best course of action is keeping it below thirty days.
• ADD or Average Days Delinquent – Another important consideration is determining the average client payments and when they are reaching a specific overdue. It is another number you wish to keep as low as possible. The moment it rises, you should check out various processes to determine whether billing is smooth and staffed to deal with collections.
• Account Receivable Turnover Ratio – This particular number will show how quickly you are collecting revenue from clients and turning it into cash. At the same time, it will indicate the cash flow that you are using. We recommend you to keep it low, because a high ratio means that you have lots of open accounts with uncollected revenue. Instead, you should revisit and deal with various processes to ensure their smoothness.

Check out this guide: https://fiscal.treasury.gov/crs/ to learn more about account receivable.

• CEI or Collection Effectiveness Index – You should know that the percentage of accounts that you decide to turn over or collect revenue on depends on this index. The main idea is to keep it close to a hundred, which is an indication that you are collecting payment from all clients that you have.
• Revised Invoices – We recommend you to avoid the requirement for revising customer invoices throughout the process. In case you can see a rise in your number of revised invoices for a certain period, you should check out billing policies and consider staffing requirements to avoid errors that delay payment and boost efficiency.