A robust and effective AR management procedure can differentiate between dwindling capital and a thriving business. However, businesses that continue to operate their AR manually will encounter numerous roadblocks that negatively impact cash flow and customer satisfaction.
To understand the accounts receivable process and its common goals, you must first master accounts receivable fundamentals. In this article, we shall define accounts receivable goals and objectives and offer guidance on how to set accounts receivable goals.
What Is Accounts Receivables Management?
Management of accounts receivable is an integral part of any business organisation. It substantially affects customer relations, cash flow, operating capital, and your business’s bottom line.
Accounts receivable (AR) are payments owed to your business for services or products that have already been provided. The process of ensuring that these payments are made accurately, on time, consistently, and dependably is a proper Accounts Receivable Process. A well-managed AR reduces overdue accounts and the time and effort required to manage them.
Outsourcing Accounts receivable services encompasses a variety of processes. It will include credit extension, customer relations, billing, monitoring and analysis of payment trends, collections, and payment reconciliation.
What Are The Common Goals Of The Accounts Receivable Management Process?
Accounts receivable can be a common source of stress for businesses, with late payments causing countless funding and cash flow issues for many businesses. Setting SMART – Specific, Measurable, Achievable, Relevant, Time-bound performance goals for accounts receivable services can help you optimise your process and decrease the amount of time it takes for your customers to pay you. So, here is the list of the goals of the accounts receivable management process:
1. Integrate A Structured Credit Approval Process
Establishing a system for credit approval necessitates consultation with the finance and accounting departments, as the decision to either grant or deny credit to a vendor could affect your revenue. Determine the requirements for establishing a line of credit with your organisation, including override and credit hold conditions. Allowing your customers to submit their applications through an automated system can reduce clerical errors and prevent fraud.
2. Define KPIs And Objectives
Your organisation’s initial accounts receivable performance objective should be centred on its objectives and KPIs. In the end, it is difficult to determine the scope of your invoice problems without the whole picture. The most prevalent metric in accounts receivable debtor days significantly impacts cash flow. Therefore, reducing the total number of debtor days should be one of your primary goals and objectives for the accounts receivable process.
There are, of course, many other metrics that you should monitor, such as the number of aged debts, the number of follow-up calls made to clients, the percentage of debts written off each month, the percentage of clients who pay late, and the number of reminders sent to clients. Choose the metrics that best meet the needs of your business and strive to reduce them as much as possible.
3. Instituting The Usage Of Credit Transactions
The company may adopt the practice of providing credit policies to its customers. This credit may be extended for a predetermined period, and any default on this payment is typically subject to a penalty. This credit facility practice requires two parties to agree on the terms and conditions for such credit transactions. Before agreeing to these terms, the provider of this facility should also verify the customer’s ability to make payments to avoid a loss of cash flow.
4. Reduce Losses Sustained From Bad Debts
Blocked cash means insufficient funds to conduct daily activities. No company would want to incur losses of any kind. Inefficient receivables management would result in bad debts, ultimately leading to losses. Receivable management will allow you to keep a close eye on the payment schedule, allowing you to follow up regularly with your debtors and maintain optimal cash flow levels.
5. Billing Clients Online
Online billing is standard in today’s business world; implementing it should be one of your accounts receivable optimisation goals if you’re not already doing so.
In terms of speed and ease, there is no comparison between online billing and mailing paper invoices. The former is immediate, whereas snail mail is so named for a reason. Similarly, it is much more convenient and straightforward to bill customers online. Creating and sending invoices is less cumbersome when you have everything in one place, and keeping track of payments is a breeze.
6. Collecting Money
Although it may seem obvious, the customer must be billed if cash is to be collected. Therefore, invoices must be sent promptly and accurately. The receipt of your invoice is the initial indicator of the effectiveness of your debt collection system for a business. If invoices arrive late and are inaccurate, your accounts receivable department will be perceived as inefficient, and customers may exploit this perceived weakness to delay payment.
In addition, if an invoice is incorrect, some customers may use this as an opportunity to assert that there is a dispute on the account and, as a result, suspend payment on all invoices until the dispute is resolved.
7. Accounting And Billing
Invoicing supports the Accounts Receivable Process in addition to credit approvals and data management. Here’s how to bill professionally and efficiently.
First and foremost, you want your invoices to be accurate, so maintain detailed records of the work, products, and services you will be billed for. Also, provide clear payment terms to avoid any confusion. Include all the terms that were agreed upon with the customer on the invoice to prevent any misunderstandings, and be sure to adhere to these terms as well. Again, this demonstrates to your customers that you are trustworthy.
8. Give Customers Multiple Payment Options
The majority of businesses prefer to conduct transactions online, but some would rather pay invoices with cash or checks. For instance, certain software permits customers to pay via credit or debit card, ACH bank draught, or by mail. Utilising a billing platform that allows you to send invoices and accept multiple payment methods makes it easier for every customer to pay their invoices.
9. Sending Reminder Emails
When the payment is due or past due, you should send a well-written email to your customers to remind them to settle their debt. This is essential for maintaining good customer relationships and a steady revenue stream.
An automated payment solution makes optimising your email payment reminders easier. For instance, with online applications, you can compose reminder emails, customise them based on the recipient, and set up an automatic trigger to send them.
Thus, customers who are late on their payments will automatically receive your email reminder without your intervention. It is essential to send email reminders, but it can be tedious and time-consuming. The described process optimisation makes an enormous difference.
10. Establish A Transparent Credit Approval System
Given that you are lending money to your clients, one of the most effective accounts receivable process goals and objectives is to establish a clear and concise credit approval policy. It is essential to specify the specific conditions under which credit limits can be exceeded, if applicable, and what must occur for an account to be placed on hold.
To accomplish this, the accounts receivable services team should collaborate closely with finance and sales to determine which policies make the most sense for your current clientele. Additionally, you should regularly review your credit limits to ensure that your policy is still applicable. Finally, depending on the circumstances, you may need to modify your policy to better align it with changing business and economic conditions.
11. Develop A Resolution System For Billing Disputes
Almost all businesses handle disputed invoices, and establishing a procedure for resolving them can lead to more satisfied customers and paying bills. Before providing the vendor with a product or service, informing them of the terms of the transaction enables them to ask questions or express any concerns before receiving an invoice. Explain each item on the invoice and offer an alternative solution if a vendor disputes their bill, such as a payment plan.
12. Streamline The Billing Process
When invoicing is not handled effectively, accounts receivable frequently run into problems. From incorrect client information to a failure to send the invoice promptly, errors in your invoice workflow can cause delays and prevent you from receiving payment. It is also important to review when you send invoices, as many businesses send invoices in batches, causing a cash flow bottleneck.
When considering your accounts receivable process objectives, you should consider automating whenever possible. By automating your process with an electronic billing system, you can reduce the risk of human error and ensure that invoices are issued as soon as the work is completed, thereby increasing your cash flow and reducing administrative burdens on both sides.
The condition of accounts receivable can reflect on the business as a whole. For example, if they are well-organised, the finances are sound, the customer relationships are thriving, and the employees are content. On the other hand, if they are a mess, the opposite is true.
A good question is how you can determine the status of your accounts receivable; achieving the goals discussed in this article is one way to determine if you are on the right track. Reaching all of them will ensure that your accounts receivable services are optimised.