The Changing World of Accounts Receivable
It used to be that a company emailed a customer an invoice for goods delivered or services rendered and then waited to receive a paper check. It was a simple system with room for improvement. The problem was that someone at the company had to produce, print and mail the invoices. Billing would sometimes be delayed because the person responsible for this function was busy doing something else.
It then became a waiting game to get paid. “I never received your invoice” or “The check is in the mail” could be used as excuses for not paying in a timely manner. Customers were in control of a company’s cash flow, and there was not much that could be done about it. Even with advances in technology, customers still have the upper hand when it comes to when they will pay.
Accounts receivable management is, therefore, a critical operational function. Systems and procedures need to be in place to ensure that invoices go out on time and payments are made according to the agreed-upon terms. Here are some practical recommendations:
Develop a Credit Policy Plan
A credit policy plan should be designed to align corporate goals with business procedures. If your credit policy plan is well executed, cash flow will improve, payment cycles will be more predictable, bad debt and write-offs will decrease, and profitability will increase.
It should include information on:
- Accounts receivable goals
- Credit terms and policies
- Average accounts receivables
- Average days to pay
- Days sales outstanding
- Bad debt write-offs
- Collection procedures
- Persons responsible for each function (credit team)
- Performance expectations (financial and for each team member)
- Key performance indicators and metrics
- Benchmarks (internal and external)
Establish a Collections Process
Cash flow will improve if companies have a collections process. Establish procedures for each class of customer (A, B and C). Develop best practices and give the credit team the tools needed to get the job done. These may include:
- Templates for email and written communication. A series of templates should be developed that get more forceful over time and are polite yet firm
- Scripts for conversations based on various situations
- Policies for dispute resolution including rules for saving a client relationship and fostering good will
Implement a Credit and Collections System
A credit and collections system will help with the invoices receivable management. This technology integrates applications such as billing and invoicing, remittance processing, collections management, dispute resolution, and reporting and analysis. Typically, a credit and collections system will include modules for:
- Credit facilitation such as credit scoring, credit application processing, credit checks, financial statement analysis, credit limit decisions, A/R monitoring and credit risk management
- Invoicing which includes features like electronic invoice presentation and payment (EIPP), electronic bill presentation and payment (EBPP), error checking, discounts and contract management
- Remittance processing in the form of electronic data interchange (EDI) and electronic funds transfer (EFT), automated clearing house (ACH), credit/debit card processing, auto-cash algorithms and routines, payment-to-invoice matching, cash settlement, and cash forecasting
- Collections management functions such as prioritizing collection efforts, payment reminders, communication tools, payment plan calculators and auto-dialers
- Dispute management features like deduction management, chargeback processing, exception reporting with automated escalation processes, collaboration tools and document sharing
The goal is for every step of the accounts receivable function to be digital — billing, payments and clearing of cash and collections. One survey of law firms found that those that accept online credit card payments get paid 39-percent faster on average.
It is important to weigh the cost and benefit of implementing an accounts receivable management system in-house versus outsourcing this function. Just as companies benefit from outsourcing payroll and accounts payable, outsourcing accounts receivable can reduce operating, overhead, technology and payroll costs, improve cash flow and help to maintain good relationships with customers.
David Rubin is the managing director of Credit Management Group, one of the leading providers of off-site accounts receivable management services.
This article appeared in the May/June 2019 issue of New Jersey CPA magazine. Read the full issue.