How to overcome challenges in the accounts receivable process

A healthy, ongoing supply of working capital is essential to the success of any business, and an efficient accounts receivable process is one way of contributing to it. Here’s our guide to conquering the challenges in the accounts receivable process to ensure you collect your receivables on time and avoid risk.

When seeking to optimize working capital, companies often focus on managing inventory more efficiently or delaying the settlement of accounts payable. While these are all perfectly viable methods, the potential working capital benefits of improving accounts receivable processes shouldn’t be overlooked.

By providing goods and services on extended payment terms, sellers effectively extend their buyers’ loans or trade credit. In fact, U.S. firms alone are owed an estimated $3.1 trillion in accounts receivable on any given day, according to the Trade Credit Dilemma Report, a PYMNTS collaboration with Fundbox.

It’s clear that many companies are missing an opportunity to make better use of their capital. By learning how to improve accounts receivable processes, companies can free up the capital they have tied up in outstanding invoices and use it to build resilience, fund growth, or seek returns elsewhere.

However, a range of common accounts receivable challenges often stands in the way of that objective. Here’s our guide to how your AR team can overcome them.

Challenges in accounts receivable process

Companies can face a range of challenges in the accounts receivable process. Four of the most common are as follows:

High days sales outstanding

Days sales outstanding (DSO) is the working capital ratio which measures the average number of days a company takes to collect its accounts receivable. The shorter the DSO, the faster a company collects payment from its customers, and the sooner it can use that cash.

While typical DSO metrics vary between sectors, an above-average DSO may indicate that a company is taking longer than necessary to convert credit sales into cash. If the company’s cash is tied up in accounts receivable for too long, this can contribute to a weak working capital position and limit its ability to invest in growth.

In some cases, high DSO may indicate that the company’s credit terms are too generous, or that customer relationships are overly liberal.

Poor communication with customers

The importance of building strong customer relationships and maintaining clear communication channels cannot be overstated. Ineffective communication can result in unnecessary frustration, confusion, and delays.

Conversely, by communicating clearly with their customers, companies can speed up dispute resolution and improve the accuracy of their information transfers. The result: a productive and mutually beneficial relationship that encourages customer retention and loyalty, increases sales and reduces the risk that credit terms will be abused.

Suboptimal data management

A business with a decentralized sales ledger or a disorganized approach to accounts receivable operations risks creating internal confusion. Without smooth, streamlined, and centralized processes, companies may lack visibility over which receivables are outstanding, which customers owe the business money, and when outstanding payments are due.

In addition, unclear accounts receivable policies can result in a lack of consistency in terms of how credit terms are offered on sales, and how collections are approached. This doesn’t just have the potential to harm accounts receivable collections themselves, but also the supplier relationships that form the foundation of the supply chain.

Unmitigated customer risks

As well as considering supplier risks, companies also need to consider the risks that can arise from their customer relationships. These may include reputational risks, like disgruntled customers leaving negative reviews on social media, or legal risks, like customers suing the business over negligence.

In addition, a customer’s financial situation can pose a significant risk. For example, if customers face short-term financial troubles or bankruptcy, the company may be left with significant AR shortfalls or bad debt. If not managed correctly, all these risks can damage the operational health of the business.

How to improve accounts receivable

Companies can improve their accounts receivable processes, by overcoming the challenges listed above, in a few ways:

Adopt centralized digital accounts receivable management

By embracing centralized accounts receivable management using a digital platform, companies can significantly improve their ability to manage the accounts receivable process efficiently and avoid confusion. Centralized AR management can result in better internal visibility over outstanding accounts receivable, better customer data accuracy and communication channels, and smoother internal processes.

Implement an accounts receivable financing program

Accounts receivable (AR) financing transforms how a company handles its accounts receivable. Essentially a form of working capital funding, it enables companies to free up capital from outstanding AR without affecting the health of their customers’ businesses.

AR financing allows the company to receive financing capital in return for a chosen portion of its accounts receivable. Structures for AR financing include asset sales or a loan. Effectively operating as a line of credit backed by outstanding debt due to be received from customers, it allows the deployment of capital that would otherwise be unusable until the outstanding invoices are settled –facilitating faster cash flow and enabling the company to make full use of its assets.

Prioritize stronger customer relationships

Accounts receivable is a process that involves engaging with customers – and inefficiencies in these interactions can result in frustration, errors, and delays that can adversely affect DSO. Companies can take steps to improve their customer relationships by communicating with customers consistently and efficiently.

By using intuitive systems, and implementing accounts receivable automation processes where possible, resolving disputes is a simple and effective process. Improving this should positively impact the company’s working capital performance.

Build better accounts receivable processes and reap the benefits

With better AR processes, companies speed up their collections and free up working capital to be used more effectively – for example, by investing in innovation or growth.

Improving communication with suppliers and investing in a centralized digital accounts receivable management tool will help companies release tied-up cash. While also benefitting supplier relationships.

Taulia Accounts Receivable Financing (AR Financing) provides a way for companies to unlock their working capital. Leveraging multiple funders with different risk appetites, the solution is integrated with Taulia’s best-in-class working capital management platform, enabling companies to flexibly free up cash from their accounts receivable.