8 Best Practices to Improve your Accounts Receivable Management

Although it looks very simple on the face of it, Managing receivables from Debtors can be a very complex task depending on the nature of our business. As our business grows and as our offering gets complex the process of collecting the payments needs to be designed accordingly. There are very few businesses, which have the luxury of receiving money before selling, i.e. Through our system, you can set up automatic, personalized reminders to send to customers when invoices are overdue. Plus, let them pay you via wire transfer, direct debit, credit or debit card — online, through an instant or scheduled payment, so they can settle up right away. Did you know that 70% of payment reminders are technical and not commercial?

• It expands the pool of potential customers who can purchase goods or services, and it gives them greater payment options.
• BlackLine’s Modern Accounting Playbook delivers a proven-practices approach to help you identify and prioritize your organization’s critical accounting gaps and map out an achievable path to success.
• It remains till the payment is made by the client or received by the creditor.
• By extending the credit facilities to their customers business are able to boost up their sales volume.
• This also contributes to increased transparency between your company and its customers, resulting in a stronger bond and a long-term relationship.
• Receivable is a type of loan extended by a seller to the buyer to facilitate the purchase process.

A good set of credit policies will help the business extend constructive and reliable credit to its customers while minimizing the risk of default. Credit policies include such important guidelines as the criteria used for evaluating customers’ credit worthiness, limits on how much credit may be extended, and the terms for repayment of credit. Since our founding in 2001, BlackLine has become a leading provider of cloud software that automates and controls critical accounting processes. While the responsibility to maintain compliance stretches across the organization, F&A has a critical role in ensuring compliance with financial rules and regulations.

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However, by using automated tools and outsourcing to specialists, businesses can make the process easier and more efficient. If a company does use an online or cloud accounting system, its employees might have to manually update the records every now and then which can make things more prone to human error. This sales mix could include things like a purchase order from a customer who has yet to pay their invoice or an open payment term from another company that hasn’t sent in their bill yet. Automation offers fewer errors, more accurate billing, and faster billing, which help you facilitate better relationships with vendors.

Sometimes after making all serious efforts to collect money from defaulting customers, the firm may not be able to recover the over dues because of the inability of the customers. Such debts are treated as bad debts and have to be written off since they cannot be realized. The firm has to incur costs for collecting payments from its credit customers. Sometimes, additional steps may have to be taken to recover money from defaulting customers.

• Company X has an accounts receivable turnover ratio of 22.8, which is pretty good.
• Companies use a variety of methods to track and manage their accounts receivable, including specialized software, spreadsheets, and handwritten ledgers.
• The tool you choose should automate the process of examining the customer’s creditworthiness to determine if your company will extend credit to them or not.
• This will help you gain better insights into customer relationships so you can make informed business decisions moving forward.
• The objective is to maintain an optimal balance between receivables and sales.

According to Hampton, “Receivables are asset accounts representing the amount owned to the firm as a result of the sale of goods or services in the ordinary course of business”. Additional funds may either be raised from outside or out of profits retained in the business. Besides sales, a number of other factors also influence the size of receivables.

Scope of receivables management:

It controls all inflow and outflow of funds and ensure that an efficient amount of cash is always available. Proper management of receivables enables organizations in efficient functioning at all the times. Receivable management has an efficient role in avoiding any disputes arising in business. Disputes adversely affect the relationship between customers and business organisations.

Accounts receivables treatment in financial statements:

Receivable management evaluates its customers borrowing capacity and repaying ability for determining their credit ratings. It approves any credit facility to its customers after analyzing their information both qualitatively and quantitatively. Proper investigation of client details helps in reducing the credit risk.

Accounts Receivable (AR) Process

If the receivables are poorly managed, it can lead to bad debts, default payments to the firm’s suppliers, and e ventually monetary losses and a loss in reputation and credibility. Receivable management business ensures that a sufficient amount of cash is always maintained within the business so that operations can continue uninterrupted. The goal of effective accounts receivable management is to optimize your billing, payments, and collections process to minimize the time it takes to get paid and eliminate the risk of bad debt. The definition of receivable management is the management of accounts not only for receivables but also for the entire process of defining credit policy and deciding payment terms. It also includes ensuring the timely collection of payments and dues, as well as sending follow-up letters and reminders for timely payments, all of which are critical aspects of managing account receivables.

Account receivables simply mean credit extended by the company to its customers and are treated as liquid assets. It involves taking decisions regarding the investment to be made in trade debtors by organisation. Deciding the proper amount be lent by the company to its customers in the form of credit sales is quite important.

Investment in receivables involves costs as funds are tied up in debtors. Investment in receivables is to be made till the incremental costs are less than the incremental return. Receivables management refers to the planning and controlling of ‘debt’ owed to the firm from customers on account of credit sales. When sales increase beyond a certain level the additional costs incurred are less than the increase in revenues. It will be beneficial to increase sales beyond the point because it will bring more profits. The increase in profits will be followed by an increase in the size of receivables or vice-versa.