How To Improve Your Accounts Receivable Process

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Establishing an effective account receivable (A/R) management strategy is a crucial part of running a successful business. Despite this, many business owners fail to take a methodical approach to the situation, and they are the worse for it.

Improving and optimizing accounts receivable processes brings many benefits to the table. A streamlined and efficient A/R process positively impacts marketing, sales, customer service, and overall operations. So, it's well worth it to devote time and effort to improve it.

Key Takeaways

  • Strong accounts receivable processes can improve every other aspect of your business.
  • Follow sound accounts receivable practices right from the start during customer acquisition and sales.
  • You can reduce errors and speed up payment by automating your accounts receivable processes.

Why Optimizing Accounts Receivable Matters

Like many business owners, you may not immediately see the benefits of optimizing your accounts receivable processes. But doing so can improve many aspects of your business. It prevents existing capital from going to waste, which increases liquidity. In turn, a business is better able to reduce debt, reduce costs, fund growth and, in many cases, outperform the competition.

Before doing anything else, commit your company to making accounts receivable a priority as early in the sales process as possible.

An important part of optimizing accounts receivable processes is to start early. Too often businesses are so intent on making sales that they treat accounts receivable as an afterthought. Starting the process early means discussing things like payment terms in the early stages of the customer relationship. Getting a new customer on board with electronic payments early in the process is another example of taking a proactive approach A/R.

Typical Accounts Receivable Pitfalls

Business owners often push accounts receivable onto the back burner; however, poor A/R practices cause a number of issues for businesses. From extending credit to unqualified customers to failing to follow up with past-due accounts in a timely manner, poor A/R practices suck time, money, and productivity from a business.


Poor A/R practices produce a ripple effect that touches virtually every aspect of running a business. The worst part of all is that many of the problems are easily avoidable.

Other common A/R-related issues include improperly applying and allocating cash payments, failing to pay attention to the accuracy of invoices and bills, and failure to generate and properly use reports to zero in on potential issues. Any one of these and other missteps can cause far-reaching issues for even very successful and profitable businesses, so it is worth it to take steps to correct them at the earliest possible time.

5 Basic Accounts Receivable Processing Improvements

Optimizing accounts receivable processes might seem daunting at the outset. However, by taking a methodical approach to the situation, you can implement changes that will result in fairly rapid and dramatic improvements. The following five business activities, when properly optimized, will drastically improve the overall functioning of your accounts receivable process and, in turn, produce other benefits for your business as a whole.

Maintain Accurate Customer Data

Centralizing the master data process to ensure the accuracy of customer accounts and information is important to establishing and maintaining an effective accounts receivable process. For example, inaccurate addresses can cause invoices to be mailed to the wrong place, which results in late payments. Customer accounts should be audited on a consistent basis to check for anomalies like unusual or inappropriate payment terms, credit limits, discounts, and the like. Changes to customer data should be properly documented, and controls should be put in place to prevent unauthorized people from accessing or editing that data.

Establish a Clear, Concise Credit Approval Process

Too often businesses slip into detrimental credit habits in order to boost sales. Extending credit can be helpful, but a process for doing so must be established and followed. It should include clear instructions regarding when and how to evaluate and override credit limits, when to place accounts on hold, and how the application process works. Regular reviews of the credit approval process should be performed as circumstances change.

Accounts receivable processes should be automated as much as possible to reduce the risk of errors from manual entry.

Establish an Effective Billing Process

The billing and invoicing of customers must be accurate and streamlined to be effective. Errors in pricing, units of measure, and the like can wreak havoc. Further, invoices must be created and sent in a timely manner, and how they are produced should be consistent and defined. One way to improve billing and invoicing is by automating it as much as possible. Use exception reports to pinpoint problematic accounts. If possible, set up a customer portal to shift some of the work to customers while giving them a sense of autonomy.

Hone the Cash Application Process

Upon arriving, payments must be applied correctly. They should be applied to the correct customer and to the appropriate invoices. Otherwise, if disputes or issues arise later, trying to zero in on the initial problem will be difficult. Payments should also be applied quickly to ensure that at any given moment, you know which accounts are current and which are past due. One potential way to optimize the process is by offering a limited number of payment options for simplicity. Post journal entries promptly and long before cutoff dates. Whenever possible, avoid dumping cash into suspense accounts until you have the time to figure out where it's actually supposed to go.

Optimize the Collection Process

Properly optimizing accounts receivable makes it much easier to collect payment in a timely and effective manner. When payments are properly applied, for instance, it's easy to determine which accounts are at risk of going into default. Collection efforts should be consistent and methodical. A clearly defined process for negotiating payment plans should be established to ensure that it dovetails with the company's overall objectives.

The Bottom Line

You don't have to start over from scratch to improve and optimize your accounts receivable. You can choose to take on one area at a time, or you can plunge full steam ahead and revamp it all at once. Either way, any steps that you take toward optimizing your accounts receivable will pay off handsomely in the long run.

Frequently Asked Questions (FAQs)

What makes accounts receivable increase?

Accounts receivable is the amount of money owed to the business by its customers. An increase in accounts receivable can mean more sales, and more credit offered to customers. A decrease in accounts receivable means less money owed to the business by its customers, usually because the firm has gotten payment and turned credit into cash.

Why is it important to reduce accounts receivable?

Reducing accounts receivable means the business is turning its sales into cash, which frees up capital for growth, adds liquidity, can help reduce debt and lower costs, and make the business more competitive.

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