Whether it be paying off short-term debt, scaling, or ensuring smooth operations even during a pandemic, working capital is one of the central pillars that can make or break an organization. However, many organizations fail to realize the amount of cash that is trapped in their balance sheets, which puts them at risk of insolvency, even though their underlying profitability may be healthy.
Accounts Receivable is one of the key drivers of the organization’s financial health and can directly influence its sales and business processes. Moreover, it also helps stakeholders to better understand the relationship between the organization and its customers – if it’s too high, it may be a sign of poor collection and unhealthy credit terms, and, if it’s too low, it may indicate a strain on the customer relationship.
Accounts Receivable management, therefore, is a critical element of an organization’s working capital optimization and has now become one of the most important job functions of a CFO. When managed properly, it ensures that the organization’s revenues are directly boosting its cash flow.
Challenges of managing Accounts Receivable
Even though Accounts Receivable management varies from organization-to-organization and industry-to-industry, there are some common challenges when trying to optimize it. If these challenges remain unchecked, they will lead to massive inefficiencies and liquidity crises. The challenges include:
- Poor collection of payment in a timely manner within the agreed-upon terms
- A high number of unresolved small-balance transactions
- Disintegrated and decentralized risk and data management processes
- Human errors due to manual invoicing and collection processes
- Minimal collaboration between the credit and the sales teams
- Underperforming ERPs, billing systems, and CRM technology platforms
Best practices to enhance Accounts Receivable processes
Most organizations do have formal accounts receivable policies that dictate when to bill, how much to bill, and when to collect, unfortunately, not all organizations enforce those policies effectively. This usually results in the organization borrowing cash to meet its current obligations, which incurs massive financial charges due to high interest, which further squeezes the cash flow. That is why organizations should implement certain practices that can best impact their liquidity.
1) Maintaining centralized customer data
Organizations should set up a master customer database containing all customer-related information in a secure, central location. It must be able to provide the sales and the customer relations team with access to real-time information such as their contact details, credit limits, payment terms, discounts, and return policies, etc.
At the same time, any error in the database will delay collections. Therefore, it is critical for the information in the database to be precise, clear, and regularly audited based on the customer’s profile and credit changes. And over time, this data should be able to highlight the customer’s track record by recommending new purchase criteria, dollar limits, payment terms, and discounts, etc.
2) Having a concise credit approval process
Organizations must have a clear, uniform, and time-constrained system of deciding whether to approve credit or not. For one, the system should be strictly enforced by the Finance department, and secondly, it must be actively implemented by the Sales teams.
However, in practice, organizations have a habit of prioritizing sales over liquidity. They often fall into the trap of extending unfavorable credit and discounts to the customers, or, even, ignoring payment terms if it means winning new sales.
3) Efficient billing process
The billing process needs to be streamlined to ensure accuracy and timeliness as any error in customer accounts, units, dates, pricing, or any other information from the master customer database can have a drastic effect on collections. This often results in back and forth emails, which increases confusion. Accounts that are troublesome should be clearly marked to enhance efficiency when dealing with them.
Automation provides the best solutions for invoicing problems. It not only reduces time and eliminates human errors but also enhances the efficiency as the invoices can be downloaded directly to the accounting systems or the ERP.
4) Streamlining collection process
Organizations should take a proactive approach to ensure Accounts Receivable are collected in-full and on-time. Days Sales Outstanding (DSO) – the no. of days it takes the organization to collect the receivables, and the Accounts Receivable Turnover Ratio (ART ratio) – the ability of a business to collect the receivables in a period of time, highlight the effectiveness of an organization’s collection policies.
The best way of ensuring a methodical and uniform collection process – a low DSO and a high ART ratio at a particular period of time, is to automate the collection process. This can help organizations streamline their collections by not only eliminating human errors but also updating any changes in the payment plans in real-time, which would ensure more precision in collection and reporting.
With world-class processes, a highly qualified and experienced team, and robotic process automation, CPA Innovations can manage and automate your accounting processes at a fraction of your current costs. We are here for you every step of the way.
Please reach out to us today for your free consultation.