What Is Accounts Receivable Management: Everything You Need to Know

Introduction

Most businesses operate on credit, but when you sell goods on credit, there’s always a risk that some customers may miss the due date, fail to pay the invoice and affect your cash flow. This is where efficient accounts receivable management becomes crucial.

A well-designed, robust accounts receivable management system helps you navigate these challenges, ensures timely payments from customers, and strengthens both credit management and customer relationships. Want to learn how? Read on.

What Is Accounts Receivable Management?

Accounts receivable management refers to the process of handling and tracking the amount a customer owes to you for the goods purchased on credit. It includes functions such as monitoring invoices, collecting payments, evaluating and mitigating credit risks, and resolving customer disputes. 

Building an effective accounts receivable management is critical to maintaining a positive cash flow and fostering a successful customer relationship. It involves a range of tasks like onboarding new customers, evaluating their creditworthiness, issuing invoices on time, and timely collection of payments. 

Additionally, AR management will help you reconcile received payments with corresponding invoices, address any discrepancies, and resolve any deduction requests raised by customers. This comprehensive approach ensures a smooth and efficient handling of collections throughout the customer lifecycle.

Scope of accounts receivable management

When you sell your goods or services to customers on credit, needless to say, you need to thoroughly keep track of all their past dues and then decide a credit term that benefits both business and customer. Managing all such outstanding receivables is extremely critical for your business since it will not only help you understand how much your customer owes you but also aid in recovering the dues and materializing your sales. You will use AR management to:

• Monitor and record outstanding amounts on invoices
• Define relevant credit terms and decide on the credit period
• Monitor and resolve long-pending invoices
• Track the payment behavior of customers and leverage insights to boost collections. 

What Are the Benefits of Managing Accounts Receivable (AR)?

AR management is critical for the smooth running of business operations and ensuring that no money is stuck on customer invoices. It helps accelerate cash inflows in the business and ensures a continuous flow of payments, streamlining future cash flows. 

Whenever a customer delays in paying invoicing, a business faces a lot of cash flow and liquidity problems, resulting in financial issues and working capital shortages. Effective receivable management will help fast-track collections, efficiently track invoices, leverage insights on customer behavior patterns, and prevent collections from aging. It will also improve the bottom line as it helps convert revenues into actual cash and add to profits. 

However, the benefits go beyond materializing sales and improving cash flows. It can also play a strong driving role in improving your business’s reputation and attracting investors as they examine how well a business handles payments, maintains timely payments, and assesses a company’s creditworthiness. 

Some other benefits of receivables management include: 

• Identifying and resolving late payments from customers early on. 
• An efficient accounting team that’s always more focused on framing strategies than merely performing collection duties. 
• Keeping account balances up to date, making account reconciliations a seamless process. 
• Rectifying errors in invoices and improving dispute management practices. 

What Are the Objectives of Accounts Receivable Management?

As your business grows, complexities in accounts receivable, such as rising bad debts, aging collections, and invoice issues like overcharging, can become more significant. To navigate these challenges effectively, it’s essential to have an efficient and agile receivables management process in place. Here are some key objectives of accounts receivable management

• Credit workflow management
  Effective receivable management is significant to boost sales and frame accurate credit policies for customers. You can extend credit and initiate favorable payment terms to increase revenue while allowing customers to pay at their convenience. 
  However, ensuring effective credit management for improving receivables calls for effective credit policies that necessitate periodic reviews, defining benchmarks, laying out escalation procedures, effective customer credit scoring, and complying with federal and state regulations. A good account receivable management must ensure accuracy at each phase and support faster collections. 
  
• Streamline cash flow management
  Receivables management’s one of the primary goals is to help businesses keep their cash flows steady. AR management gives you a clear picture of where and how much of your cash is tied up and records all sales transactions systematically. It also ensures you have sufficient cash in your reserves to carry out daily operations, not giving out credit benefits over and above the decided credit limit to customers. 
  
• Improved customer relations
  How you handle your accounts receivables can significantly affect customer relations.
  Continuously reaching out to a customer after they have already made a payment can lead to frustration. Similarly, expecting payments from customers without sending invoices on time can also have a negative impact. It’s therefore important for you to ensure transparency in the accounts receivable management process to build a stronger and long-lasting relationship with your customers. 
  
• Accurate bank reconciliation
  Bank reconciliation involves managing various remittance formats, including addressing missing remittances. This task can be time-consuming and prone to errors if not organized properly. Without an efficient system in place, your AR team can waste significant time sorting and applying payments.
  
• Improved invoicing issuance and tracking 
  Streamlining invoicing processes can prevent billing errors and ensure invoices reach customers. A thoughtfully built AR management facilitates easy invoice sending, enables direct payments, and tracks invoices regularly and accurately. Additionally, it can also assist you in providing various payment choices, like credit/debit cards or ACH drafts, enhancing customer convenience. 
  
• Effective deduction management process
  In case of disputes, effective receivable management enables AR teams to explain each item to the customer and offer alternative solutions such as payment plans. Moreover, it also helps rethink your existing deduction management process,  validate customer invoices and resolve disputed invoices on time, leading to customer satisfaction and a seamless experience.
  

Important Steps in AR Management

Remember that offering goods and services on credit is the same as how a bank lends credit to its customers. This means you must always be vigilant and ensure you receive your payment on time, put a proper system in place to monitor payment status, and implement proactive measures to retrieve collections while protecting your net worth. Here are a few steps to consider to strengthen your AR management. 

• Implement credit rules 
  Evaluate all implied and possible credit risks before granting one. Put every customer under the same credit granting process, and make an accurate evaluation of their creditworthiness. When granting credit, make sure the terms and conditions are favorable not only for the customers but also for the business and help speed up collections. 
  Consider using solutions like automated Credit Management software that comes with integration with credit rating agencies to extract credit data and monitor risk in real time. You also get automated credit review and decision features that help set credit limits in no time and give credit suggestions based on payment behavior, credit score, etc.
  
• Create documents for terms and conditions 
  Make sure you clearly state all the payment terms and conditions. If you are charging interest or late payment penalties, your document must mention this and should only change unless absolutely necessary. Also, make sure your customer has gone through the policies carefully, understands them, and signs the contract after adjustments. Maintain all documents and customer interactions including emails, texts, phone calls, etc. 
  The best way is to integrate an in-app dialer into your AR management system. Automated solutions like these will help your team transcribe all customer interactions, make notes for promise-to-pays, payment reminders, dispute calls, etc., and keep them documented. 
  
• Clear collection plans
  Prepare a plan for handling delinquent accounts. Determine the reasons for late payments. You can use automated collections cloud solutions that will help integrate with customers’ invoice portals, monitor customers’ behavior and payment patterns, and give you meaningful insights. Leverage them to strategize your collections and ensure timely payments. 
  
• Build invoice template and send reminders at regular intervals
  You must send invoices immediately right after delivering goods or services. Make sure all information is available and up-to-date. Mention the terms and conditions of payments and the date of invoice maturity. One of the best practices here is to embed the payment link in the reminder email so customers can click on it and pay on the go. 
  

Accounts Receivable Management Challenges

Accounts receivable management challenges usually include misalignment between sales and AR teams, manual processes, data fragmentation, disruptions in accounts receivable workflow, and the absence of empirical data. Businesses need structured accounts receivable management to combat them. 

• Misalignment between sales and finance goals
  The disparity between the goals of the sales and finance departments can lead to conflicts. While the sales team aims to increase sales, the finance team focuses on reducing bad debt. This misalignment becomes evident when the sales team promises credit terms to customers that the finance department may not approve of.
  
• Inefficiencies due to manual processes
  Numerous gaps in the existing processes necessitate laborious manual efforts. Without automated accounts receivable processes, the team is forced to dedicate significant time and resources to manual tasks across all aspects. These inefficiencies ultimately result in poor accounts receivable management.
  
• Impeded collaboration due to data fragmentation
  The absence of a unified data system and information silos creates obstacles to effective collaboration. Without real-time access to centralized data, customer-facing teams such as sales, collections, and others struggle to collaborate efficiently. This fragmentation of data hinders their ability to work seamlessly towards common objectives.
  
• Absence of empirical data for predicting negative outcomes
  The lack of a mechanism for utilizing empirical data hinders the ability to forecast potential adverse consequences. Failure to document historical data makes it exceedingly difficult to anticipate when a customer’s financial situation may undergo a detrimental shift, potentially resulting in substantial losses if they become unable to fulfill their future payment obligations.
  
• Disruptions in AR workflows
  Efficient management of credit transactions requires consistent documentation, particularly in terms of invoicing and payment flows. Inadequate streamlining of the accounts receivable processes can lead to disruptions and gaps within the AR workflow, hindering the smooth continuity of operations.
  

How to Measure the Performance of Accounts Receivable Management

Some commonly used AR metrics by businesses are DSP, collection effectiveness index (CEI), and average days delinquent (ADD). However, there are other metrics as well, such as expected cash collections, number of revised invoices, average collection period, high-risk accounts, etc., but these are the most prominent metrics and give a holistic view of the AR management performance. 

• Day sales outstanding (DSO)
  DSO (Day sales outstanding) refers to the average time credit sales take to turn into cash.A higher DSO means your customers are taking too long to fulfill their debts and are failing to meet the agreed payment terms. If the KPI is higher than the average, ensure the credit plans help you keep a lower DSO.
  To calculate a business’s DSO, divide the total AR outstanding by the total net credit sales. Then, multiply the result by the number of days. 
  
  DSO = (Accounts Receivable / Total Net Credit Sales) x Number of Days
  
  
• Collection Effectiveness Index (CEI)
  The CEI (collection effectiveness index) computes the percentage of AR a business collects during a given period of time. It evaluates the collection efficiency over regular intervals as well as longer periods of time. A higher CEI means AR management strategies are bringing good results. A lower CEI means factors like manual invoicing, inefficient payment terms, etc., are hindering collection efforts. 
  To calculate the CEI, add AR at the beginning of the month and credit sales, then subtract total credit sales at the end of the period. 
  
  CEI = [(Beginning AR + Monthly Credit Sales) – Ending AR] / [(Beginning AR + Monthly Credit Sales) – Ending Current AR] x 100
  
  
• Accounts receivable turnover ratio (ARTR) 
  ARTR (accounts receivable turnover ratio) refers to the number of times a business collects its average receivables. It is an efficiency metric and is also referred to as debtor’s turnover ratio or receivables turnover ratio. The metric provides a general prediction of when an AR team can receive payments from customers, converting receivables into cash. A higher ARTR means you are effectively collecting debts and have stable financial positions. 
  
  To calculate ARTR, determine the net credit sales: 
  Net Credit Sales = [Sales on Credit – (Returns + Sales Allowances)]
  Then, calculate the average AR
  Average receivables = [Starting Receivables + Ending Receivables) / 2]
  And then divide the net credit sales by the average AR
  ARTR= [Starting Receivables + Ending Receivables) / 2]
  
  
• Average days delinquent (ADD)
  ADD helps find out how late a customer will pay on average at a given period and looks only at past dues. A high ADD is not a good sign as it means customers are unusually slow to pay. A lower ADD means you have effective receivables management, ensuring timely payments from customers. 
  To calculate ADD, find DSO and subtract the best possible days outstanding (BPDSO), which calculates the ideal time a company can collect payments. 
  ADD = DSO – BPDSO 
  
  ADD = [(Accounts Receivable / Total Net Credit Sales) x Number of Days] – [(Current Accounts Receivables / Total Net Credit Sales) x Number of Days in Period] 
  
  

How Can You Improve Your AR Management Process

There are many components to accounts receivable management. To manage the process efficiently, you must handle elements such as credit risk mitigation and evaluation, invoicing, collection, reconciliation, and dispute resolution with utmost care and diligence. 

Here are some accounts receivable management techniques that will help you address each element of AR and gain comprehensive control over the process.

1. Clear internal processes

Often, the root cause of your collections and cash flow issues is simply poor internal processes. One of the easiest ways to mitigate these constant issues is to make sure that each team understands the other’s end objective. Sales should focus on getting orders, and the finance team should ensure that the customer is financially sound enough to warrant credit terms. However, it is equally critical for each team to support the other in these processes.

2. Two-way communication

Establishing effective two-way communication is vital, both internally and externally. This may seem like an obvious factor, but it is often ignored, especially when it comes to the finance team and customers. Enable easy-to-use and numerous options for stakeholders—both internal and external to interact in the way they choose to.

3. Robust post-sales setup

Many collection issues stem from customer dissatisfaction with post-sales support. This tip applies to all customer-facing teams. As a member of the finance team, you should ensure that all sales-related documentation reaches the customers timely. Additionally, you can streamline the invoicing process with meticulous attention to detail.

4. Timing and tone

In invoicing, two crucial aspects must be perfected. First, ensure that invoices are sent out promptly and in line with agreed payment terms. Establishing a consistent invoice delivery schedule prompts customers to anticipate and prepare for on-time payments.

Secondly, pay attention to the tone of your communication when sending invoices. Maintain a clear, concise, and polite approach in both the invoice content and accompanying email communication. Avoid clutter and ensure all necessary details are included for a smooth payment process.

5. More payment options

When it comes to facilitating payments, providing multiple options is paramount. This approach ensures that customers can make payments even when their authorized personnel are unavailable due to travel or other commitments. By offering a range of payment options, you enhance convenience for your customers, eliminating the need for them to disrupt their daily routines to fulfill payment obligations.

6. Quality all the way

In B2B transactions, particularly those involving deferred payments, maintaining high-quality standards is essential. Quality should encompass not only the products or services you provide but also the quality of customer interactions at every stage of engagement. Ensure that a commitment to quality permeates every aspect of your operations, from production and logistics to inventory management and your finance department.

7. AR automation

One of the most important and urgent steps to streamline receivables management is to automate the process. API-enabled automated accounts receivable will not only handle collections or invoice issues but helps create efficient workflows, reduce process complexities and operational costs, and accelerate your teams’ productivity.

Streamline AR Processes with Accounts Receivable Management Software

One of the best ways to streamline receivable management is to automate it. Automating AR offers numerous benefits. It will help you manage global nuances, get accurate insights into customer behavior, and benefit from differentiated functionalities for timely and speedy collections. 

• AI-driven worklist prioritization to reduce manual work 
  AR automation helps reduce repetitive work with AI-driven worklist prioritization. It will help you identify higher-priority invoices and collections based on dollar values and provide insights into customer behavior by tracking customer AP portals. It will also note customer interactions and track responses. You can also automate sending reminders to customers for payments and avoid duplication.
  
• Real-time credit monitoring
  AR automation helps you track credit risk in real-time and gain complete visibility over customer portfolios. These automated systems utilize advanced analytics to obtain real-time credit data and assist you in evaluating customers’ creditworthiness, detecting potential risks, and making informed decisions to adjust credit limits.
  
• Efficient deductions management process
  The deduction management process is one of the most important elements of an AR management process. AR solutions will help proactively validate claims, match them to reason codes, prioritize claims, centralize deductions-related data, and send no denial correspondence. This will help you reduce day deductions outstanding (DDO) while you solve disputes with a rocket-like speed. 
  
• Shift towards proactive collections strategies 
  The reactive approach means that actions are only taken when payments are overdue. Automated AR solutions help you move towards proactive approaches by leveraging advanced AI algorithms in a collections cloud that will systematically identify the invoices with a high probability of delinquency and prioritize collections team efforts accordingly. 
  

Boost Your Accounts Receivable Management Process with HighRadius Automated AR Suite

HighRadius offers powerful, cloud-based Order to Cash software to automate and streamline financial operations. This comprehensive suite includes Collections Management, Cash Application, Deductions Management, Electronic Invoicing, Credit Cloud, and dotOne Analytics to enhance your team’s efficiency and optimize its workflows.

• HighRadius’ AI-powered collections software helps prioritize worklists for the top 20% of customers and automates collections for 80% of long-tail customers. This results in a 20% reduction in past-due accounts and a 30% increase in collector productivity.
• With AI-driven data capture and matching algorithms, HighRadius achieves 90% automation in same-day cash application, eliminating bank key-in fees entirely and boosting team productivity by 30%.
• HighRadius’ AI-powered deductions management software accelerates deduction research and resolution, enhancing analyst efficiency by 40% and improving net recovery by 30%.
• HighRadius’ AI-based credit solution provides real-time credit visibility and global portfolio management, reducing bad debt by 20% and improving credit application approval time by 90%.
• HighRadius’ AI-powered Electronic Invoicing Solution enhances customer experience with a self-serve portal for buyers and multi-channel invoice delivery, increasing billing analyst productivity by 20%.
• Using HighRadius Analytics, you can make informed decisions with visualized data. Track operational KPIs and enable data-driven decision-making through comprehensive reports and peer benchmarking.

FAQs

1) What is meant by accounts receivable management?

Accounts receivable management refers to the process of managing and tracking the payment due from customers for the goods and services purchased on credit. It includes tasks such as tracking invoices, collecting payments, examining and mitigating credit risks, and resolving disputes. 

2) What are the five steps to managing accounts receivable?

Here are the five steps to managing accounts receivable: 

Implementing credit rules

• Framing and documenting payment terms and conditions
• Building invoice templates and sending reminders at regular intervals
• Setting up clear collection plans
• Creating an AR Report for measuring the liquidity

3) Why is accounts receivable management important?

Accounts receivable management is critical to ensure the smooth running of business operations and that no cash is tied up in customer invoices. It helps: 

Accelerates cash inflows

• Identify and resolve late payments from customers
• Keep account balances up to date 
• Maintain accuracy when reconciling accounts

4) What are the most common challenges with AR management?

Accounts receivable management commonly faces challenges such as high DSO, misalignment between sales and AR teams, manual processes, data fragmentation, workflow disruptions, and a lack of empirical data. To address these issues, businesses need to implement a structured and agile AR management system.

5) What is poor management of accounts receivable?

Poor management of accounts receivables refers to the various operation and financial issues of business that impact the receivables management efficiency . Some of the common drivers are late invoices, higher DSO, data discrepancies, inadequate credit checks, time consuming manual processes, etc. 

6) How do you manage account receivables effectively?

Here are a few ways to manage accounts receivable effectively: 

• Establish a clear internal process
• Ensure a two-way communication
• Build a robust post-sales setup
• Make sure of the timing and tone
• Make more payment options available
• Initiate high-quality customer interactions 
• Automate the accounts receivable management process