8 min read
13 Apr 2023
8 min read
13 Apr 2023
In competitive markets or challenging economic conditions, businesses benefit from optimizing for working capital. Freeing up funds provides more financial ammunition that can be used to fuel growth or build operational resilience.
Accounts payable optimization is often the first target for businesses seeking a stronger working capital position, but it’s not the only option available. Accounts receivable optimization is another opportunity that’s well worth pursuing.
Businesses can focus on improving their approach to accounts receivable (AR) management, and in the process unlock more cash, reduce operational costs, and improve overall efficiency.
Let’s take a closer look at what the accounts receivable management process involves and how companies can manage their AR more effectively.
Accounts receivable management refers to the approach taken to managing and collecting outstanding customer payments, which are collectively labeled accounts receivable. Listed as a current asset on the balance sheet, accounts receivable represents the value of all outstanding invoices.
It’s often a relatively significant figure in total but isn’t able to be deployed in operations until customers pay their invoices. Late payments can, therefore, be detrimental to the financial health of a business and its ability to capture opportunities.
The faster companies can collect payment from customers, the sooner they can use the resulting cash to cover operating costs, build resilience, generate returns from investment, or drive revenue growth.
In short, AR management is concerned with expediting the process of collecting outstanding customer payments. Done effectively, it can be just as valuable a lever as accounts payable when it comes to building a strong working capital position.
But it’s not without its challenges. Siloed or inaccessible AR data, difficulty tracking outstanding invoices, cumbersome customer communications, and time-consuming reconciliation processes can all make the AR collection process less efficient.
Fortunately, companies can address these and other challenges by practicing effective AR management. This not only improves the performance of the AR department in isolation but can also benefit the business as a whole.
Before moving on to methods of improving the AR process, it’s useful to first review the process itself. While the details may differ from company to company, the accounts receivable management process typically includes the following steps:
The above mentioned process is full of sub-processes that can be optimized and improved to make accounts receivable management more efficient overall. There are several key ways to improve AR management, including:
Arguably the most important part of an AR process, ensuring customers have a full understanding of payment terms and policies, can prevent issues from arising when it comes to actually settling invoices.
Payment terms should be spelled out explicitly to customers during the onboarding process, stating due dates, available early payment discounts, and any potential late fees or charges. By highlighting terms in initial agreements and ongoing correspondence – which can be referenced in the event of any dispute – companies can avoid future misunderstandings.
There are various key performance indicators (KPIs) companies can use to measure the general effectiveness of their approach to accounts receivable management, and to monitor the effects of optimization. Common AR metrics include:
Effective communication increases trust and the flow of information in buyer-supplier relationships, whereas ineffective communication limits it. Open communication channels allow businesses to build positive customer relationships, making it easier and simpler to chase payments and settle disputes.
By implementing a centralized digital accounts receivable management system, businesses can gain more visibility over unpaid invoices and track customer performance more effectively over time. It’s important to ensure that any centralized system is accessible to all stakeholders, with appropriate controls.
Late payments aren’t always the buyer’s fault – the range of payment options the supplier offers can impact on-time payments too. Offering various payment options beyond simple paper-based invoicing, including solutions such as electronic invoicing and digital payment portals, makes it easier for customers to pay, thereby reducing delays.
Businesses can also improve AR efficiency by streamlining the receivables management processes. Automating different parts of the process – enabling automatic invoice creation from purchase orders or sending automatic payment reminders, for example – is a quick way to improve inefficient manual processes, reduce costs, and minimize the potential for human error.
Lastly, businesses can use accounts receivable financing to improve their accounts receivable management and support their broader working capital objectives. AR financing acts as a line of credit backed by outstanding monies owed by customers, generating working capital in return for a chosen portion of its accounts receivable.
Taulia Accounts Receivable Financing offers an efficient – and flexible – way to access cash and free up working capital without harming supplier relationships. With our innovative technology, businesses can connect with our platform, bypass the limits of traditional AR financing, and start accessing funding across the entire cash conversion cycle.
When seeking to optimize working capital, companies often focus on managing inventory more efficiently or delaying the settlement of accounts…
Effective accounts receivable management is crucial when it comes to maintaining healthy cash flow, building operational resilience, and fueling growth.