How to Improve & Increase Accounts Receivable

How to improve accounts receivable collections

1. Standardize invoicing and collections

Given the critical role that accounts receivable plays in your business, you need smart, clearly defined processes to support your invoicing and collections efforts. Ideally, you’ll want to create as streamlined a workflow as possible that eliminates duplicate steps and consolidates enterprise-wide operations into a common framework. 

For one, for each stage in the process, you should define who oversees each task, limiting the list to only the most critical of roles or staff.

Your dunning or collections efforts ought to be similarly regimented. Set up a schedule for sending follow-up communications to remind each of your invoice-holders of their upcoming (or outstanding) debts and the corresponding due dates. By staying consistent in these touches,  your customers will be much less likely to forget their obligations.

Commonly, you can handle much of these streamlining efforts by deploying accounting software, ideally choosing a platform that offers customizable workflow automation.

2. Leverage accounts receivable aging reports

Requiring relatively little effort to create, an A/R aging report simply lists any unpaid invoices or other receivables owed to your business. Commonly, the document will record a list of your customers and how much they owe, segmenting the overall total into smaller portions that reflect the timeframes when the associated funds were due (e.g., 30 days ago, 60 days ago).

With this information in hand, you can easily track the promptness of your customers and pursue appropriate collections efforts or term renegotiations as needed. Further, you can better identify accounts that are struggling to keep up with payments or seem likely to default, empowering you to limit the impact of their financial challenges on your business.  

3. Make it easy to pay you 

Customers don’t want to struggle to give you their money. In fact, according to a survey of over 400 companies conducted by Balance Payments, Inc., roughly 83% of respondents indicated that their top priority when choosing an online supplier was a smooth payment and checkout experience. And 90% stated that complicated buying efforts would substantially impact their brand loyalty.

Given these statistics, you might consider simplifying your payment operations as much as possible. A dedicated portal, for example, can provide buyers with a centralized — and hopefully intuitive — means to manage their orders and payments. Similarly, you should include clear payment instructions on any invoice you send out, informing buyers when, where, and how to pay.

4. Offer early payment discounts

The more time that passes from delivering a good or service, the less likely the buyer will be reminded or motivated to pay the corresponding debt. As such, you should send out your invoices as close to the time of sale as possible. Similarly, any encouragement you can offer to finalize the payment within the first couple of weeks after an invoice is sent should be given.

Consider providing buyers with an early payment discount that delivers some benefit — such as a percentage discount or waived shipping fees — for payments that arrive within ten days of the invoice date. The extra incentive might be just enough to accelerate their payment.

5. Use a human touch

In every interaction with your customers — but exceptionally when requesting money from them — you should operate with a sense of care and compassion for the person at the other end of the exchange. Conversations about delinquent or missing payments can be awkward, so don’t solely rely on automated touches.

Particularly for your dunning efforts, consider a multi-channel approach incorporating personalized emails or phone calls. The more rapport you can build with the accounts payable (A/P) staff at your buyer’s company, the more likely you’ll reach a satisfying conclusion, no matter the challenge.

At the same time, any complaints or issues your customers might bring to your attention — whether A/R-related or otherwise — should be promptly handled. After all, a satisfied customer is more likely to become a repeat customer.

6. Automate whatever you can

As previously mentioned, any potential delays to your A/R processes will reduce the likelihood that you’ll ever receive payment. So, you’d be wise to eliminate the unnecessary wait times typical of manual processes. Instead, accelerate your accounts receivable efforts with a software platform like Invoiced that offers automated workflows to move your invoices throughout the process without direct human intervention.

Beyond straightforward efficiencies, automation can also help avoid transcription errors and other mistakes common to manual operations. And when your invoices are more accurate, you’ll spend less time fielding complaints or inquiries, improving overall customer satisfaction.

7. Be wary of fraud 

Unfortunately, most fraud associated with your A/R processes can be traced back to rogue employees rather than outside threats. Commonly, they’ll compromise either your accounting systems or communications with buyers to redirect payments to external dummy accounts. Other times, they might work directly with an unscrupulous customer to falsify documents and record non-existent payments.

A criminal employee might take many strategies, but by proactively monitoring your financials, you can limit their potential damage. For example, keep a close eye on how much bad debt you accrue — a sudden increase might suggest hijacked payments. Similarly, you should regularly review any notes or comments in your general ledger or other financial records to see if process anomalies are being used to hide fraud.

In a 2022 report on occupational fraud, the Association of Certified Fraud Examiners (ACFE) noted that among the more than 2,000 cases it studied, 42% were detected thanks to tips rather than direct monitoring. As such, consider setting up a phone or email hotline where employees can anonymously report questionable invoices or incidents.

8. Manage your risk 

Any time your business extends credit to a buyer, it’s a gamble. But these bets don’t need to be made blindly. For any new customers — or existing ones wanting to make a larger-than-usual purchase — you should do your research, exploring the credit history of the organization as well as any available financial reports or press articles regarding its fiscal health. Depending on your relationship with your competitors, you might even check in to see if they’ve had prior dealings with the particular buyer.

The value of proactively identifying and avoiding potential credit risks cannot be understated, offering you an effective means of limiting the amount of bad debt you accrue and the time and energy you waste chasing it. You can still do business with these organizations — just get paid upfront or require cash on delivery (COD).

9. Use external agencies only as a last resort 

Few things can implode a customer relationship faster than bringing collection agents or lawyers into the discussion, so you likely only want to pursue this option if you are certain that the relationship is unsalvageable. In addition, working with outside agencies can result in higher costs that leave you spending more money than you’ll ever retrieve. As such, you should analyze these outstanding debts to see if they are worth spending the additional time and expense.

10. Track everything 

Of course, it doesn’t matter how many best practices or innovations you deploy in your A/R processes. What matters is whether or not they are effective. The best method to understand what is and isn’t working in your collections efforts is to track various key performance indicators (KPIs) over time. By reporting regularly on these metrics, you can often isolate bottlenecks and detect payment patterns that were previously unnoticeable. Armed with this insight, you can also make more intelligent, more informed choices for the future.

You’ll typically want to monitor your:

• Average days delinquent (ADD): Your average days delinquent contrasts how many days it takes for your business to be paid by your customers versus how long it should take.
• Accounts receivable turnover (ART): The accounts receivable turnover metric denotes the efficiency of your A/R operations by tracking the number of times during a given period that your business collects its average accounts receivable balance.
• Bad debt to sales: Also known as the “write-off rate,” this ratio lets you track how much of your total sales are never collected.
• Collections effectiveness index (CEI): This aptly named KPI uses the ratio between the number of your delinquent accounts and total accounts to track the efficiency of your collections efforts.
• Days sales outstanding (DSO): Your days sales outstanding identifies the average number of days your business requires to collect payment for a sale.

Optimized your accounts receivable process with Invoiced

When done right, your accounts receivable processes will include extensive oversight, comprehensive monitoring, and nuanced client communications — which can be incredibly time-consuming and costly when done by hand. Conversely, choosing the right accounting automation solution can help simplify and accelerate these actions while freeing up staff and limiting the potential for human error.

Invoiced’s Accounts Receivable Automation software includes Smart Chasing technology that will:

• Standardize and formalize your dunning efforts
• Dispatch regimented, multi-channel communications that keep customers aware of their current obligations without nagging
• Streamline and automate not only the sending of invoices but also the resolution of corresponding complexities, such as disputes or discounts

Meanwhile, our integrated payment portal makes it rather easy for buyers to monitor their accounts, review outstanding invoices, manage subscriptions, and finalize payments from a standard interface.

To learn more about our accounts receivable solutions, schedule a demo today.