Most businesses have an accounts receivable (AR) policy that governs when and how much to bill and when to collect. Research demonstrates that not all businesses implement such policies efficiently.
Outstanding accounts receivable service stifles cash flow; drains the capital required to engage in development possibilities, purchase new equipment, and hire people – that’s just the tip of the iceberg.
4 Common accounts Receivable Obstacles
The credit is used to build customer loyalty and expand your consumer base. Providing these payment choices without a solid plan in place can lead to cash-flow issues and potentially imperil operations. The accounts receivable management team, in particular, may encounter the following challenges:
1. Above-average Days Sales Outstanding (DSO):
DSO is the average time, accounts receivable service takes for credit sales to be turned into cash. A high DSO indicates that your clients are taking too long to settle their obligations, exceeding the specified payment terms. It may also be a wise decision to implement a new protocol and do some financial planning.
DSO reduction strategies include:
- Streamline your plan. Set up a solid debt collection strategy to ensure that every invoice is received on time and with clear payment terms.
- The accounts receivable service makes it easier for them to pay by providing several payment choices.
- The accounts receivable management encourages early or on-time payments.
2. Disorganization of the ledger:
Keeping your invoices organized is essential for knowing how much money you’re owed, by whom, and when they’re expected to pay. Poor accounts receivable administration can lead to a cash-flow deficit, so having a system that offers you total visibility is critical for responsible (AR) accounts receivable management.
Ways to Improve Ledger Management:
- Go paperless. If you don’t already have an ERP, get one. You may choose to eliminate paper checks and invest in accounts receivable automation.
- Keep all of your information in one location. Your accounts receivable procedure is prone to accidental fragmentation.
- Examine the AR procedure. Conduct regular audits of master data to discover consumers with unusual credit limits, payment conditions, and discount rates.
3. Poor customer communication:
Establishing communication channels and points of contact is necessary at the start of any client engagement and is critical to getting paid on schedule. Keeps track of all times you have communicated with your consumer and through which methods.
Ways to Improve AR Communications:
- Regularly update the information. Having outdated records makes it simple for invoices to be mailed to the wrong address, adding to late payments.
- Send invoices with payment terms; a due date as soon as a contract is signed.
- Make use of accounts receivable automation solutions; assist you to set up a recurring invoicing plan.
4. A lack of appropriate policies:
As much as we all like onboarding new customers and expanding our user base, the worst thing we can do is undermine the business through ineffective AR management rules.
Ways to enhance AR policies:
- Review the credit approval process on a regular basis.
- Make sure your credit terms are clear and fully acknowledged by your customer.
- Create a rigorous credit analysis method based on your customer’s industry.
Meru Accounting, a CPA firm, provides outsourced bookkeeping and accounting solutions to small and medium-sized businesses in the United States, United Kingdom, Australia, New Zealand, Hong Kong, Canada, and Europe.
