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Accounts Receivable Best Practices that Boost Cash Flow

Business owner paying bills online

Successful businesses do many things well. But few succeed without following best practices for accounts receivable.

Late payments wreak havoc on cash flow and can affect a business's ability to pay its own bills, receive financing, and survive for the long term.

"It's important to pay very close attention to your accounts receivable," says Robert Morlot, managing partner with Tampa consulting firm Clearwater Business Advisers. "It helps you reduce your financing costs, which in turn can make it easier to expand your business. You have a lot more flexibility when you have that free cash flow."

Setting an AR Goal

Good accounts receivable management starts with good information. "If you're not getting paid, you need to understand why," says Steve Player, a senior research fellow with Houston benchmarking organization APQC. "Did we not invoice correctly? Is there a dispute? Is it due to deterioration with the customer's financial situation?"

To answer these questions, businesses need to talk to customers, as well as studying their own processes. Morlot suggests using your internal information to set a target for accounts receivable performance. Base the answer on your own business needs. The percentage of outstanding receivables that works for one business may spell disaster for another, he notes.

"You have to pick a receivables date that's meaningful," Morlot says. "Maybe it's 60 days or 45 days. But whatever it is, measure it." Then figure out what percentage of receivables are over the target date and try to manage to reach the desired percentage.

Managing for Better AR Performance

Many businesses turn to technology to improve accounts receivable:

  • Electronic invoicing can make it easier for customers to receive bills.
  • Artificial intelligence can help identify credit risks.

Automating accounts receivable tasks gets most of the attention, however. The goal with automation is not to do the same jobs faster, Player says. It's to cut out steps, especially those that involve rekeying data.

"We're trying to use technology to eliminate redundant functions," says Player. Digital processing that requires information be entered only once reduces both cost and errors.

Refining Credit Terms

Avoiding selling to customers who are likely to be slow payers will help businesses go a long way toward improving accounts receivable performance. Effective and informed credit policies that outline which customers will get time to pay and which will be encouraged to pay sooner can have a large effect on cash flow.

"Always review your current policies and implement strategic credit policies that will be a benefit to the customer paying and to you as a business," says P. Simon Mahler, a mentor with nonprofit mentoring organization SCORE in Herndon, Virginia.

Mahler recommends that you:

  • Always give an incentive to pay off quickly.
  • Always reward customers who make timely payments.
  • Review the credit policy and make sure you have a system that works best for you, so you can keep growing the business.

Good credit policy design doesn't happen completely internally, as Player reminds business owners. It requires understanding what is happening with customers, as well as internal data on receivables aging.

“Everything gets back to visibility. How do we spot problems?”
- Steve Player

Senior Research Fellow at APQC

Using the Human Touch

Large enterprises may use electronic data interchange so that invoices and payments are processed almost entirely without human touch. But, even then, people are important to the accounts receivable process.

Morlot says this is especially vital to keep in mind when staffing accounts receivable positions. "I made sure that the manager of the invoicing process was meticulous," he says of a time when he ran a division of a large company. "And I double-checked the process to make sure that every time we cut an invoice, it was accurate."

Relationships can be as important as accuracy, Player says. He suggests making sure customers have an easy way to speak directly to a human in accounts receivable when they have questions about invoices or payments. And he advises businesses that are fine-tuning accounts receivable processes to remember that best practices require taking care of customers.

"Any time you're dealing with customers, it's a moment of truth with your most valuable asset," Player says. "Make sure you don't undo all the work you did delighting the customer with your goods and services by having an annoying payment system."

If you're interested in learning more about using these Accounts Receivable strategies to help boost your business's cash flow, click here.

Manage Your Receivables