5 Impossibly Simple Ways to Improve A/R Performance in Your Organization
Everybody knows that a business has to have money to survive, but maintaining steady cash flow is not easy when customers don't pay on time, a problem companies struggle with regardless of size of industry. In Fact, research from Pay Stream Advisors found that the average terms extended by companies in the United States are 28 days, but the average DSO for companies in the US is 61 days--that's more than twice the agreed upon terms! Luckiy there are a number of simple things you can do to start collecting invoices on time and increase the cash flow you need to maintain and grow your business.
1. Give A/R management the attention it deserves.
Considering that A/R represents the cash owed to you that you have not collected, it’s truly one of your largest and most important assets. Many companies see A/R management as just another accounting function, but it’s much more than that and should be treated as a strategic business area. To turn A/R from an accounting function to a strategic role, you need a credit and collection policy. There is a lot to know about writing an effective credit policy, learn how to get started here.
2. Follow invoicing best practices.
Your success of failure when it comes to A/R begins with an invoice and while the premise behind and invoice may seem simple, there is a right way and a wrong way to write an invoice. Here are a few best practices to live by:
- The faster the invoice gets to the customer, the more time they have to ask questions, get approval, and pay it before the due date.
- Be sure the invoice is clear and complete! Industry research found that 46% of invoices are paid late because of administrative errors such as missing or incorrect information on the invoice, so always be sure to double check them before sending them out!
- Include all of the information and instructions the customer will need to pay you.
- Include clear payment terms and due date on the invoice as well as a remit to address. Calculating the due date for the customer will help them focus on that date.
- Make sure you have the right billing address to ensure the invoice doesn’t get lost along the way, this is especially true of your larger companies who may have multiple locations. You may also want to skip the mail all together and send your invoices electronically or enable online payment options.
3. Keep in touch.
While actually paying the invoice is the customer’s job, it’s a collector’s job to make sure they remember! Many times your customers are not delaying payment on purpose, they just forgot. A simple email letting a customer know an invoice due date is approaching is an extremely effective way of increasing on-time payment. Here is a time table for effective follow-up that won’t annoy your customer:
If you're currently using your ERP or accounting systems, spreadsheets, and aging reports to manage accounts receivable, following the above timeline can be extremely overwhelming and unsustainable. You may want to consider automating communications with a receivables management system so you can send reminders without having to lift a finger!
4. Focus on relationships, not just money.
Accounts receivable is an accounting function but it’s a critical customer service function too. Accounts receivable is usually the last contact a customer will have with your company, so it will be at the forefront of their mind when they consider whether or not to work with you again in the future. By making the payment process fast, simple, and stress free, credit collection employees can play a large role in driving repeat sales while also collecting invoices faster. Remember to always keep your cool no matter how frustrated you might get. Here are a few things to remember:
- Never imply that the customer deliberately ignored the invoice, even if you think they did! Use terms like “overlooked invoice” and apologize if you’re the one who made the mistake.
- Be firm, but don’t be aggressive or threatening. Use assertive language that tells them exactly what you’d like them to do.
- Always end a letter, call, or email with an offer to help.
- Read this guide on friendly and effective A/R communication.
5. Give collectors the time and tools they need.
As mentioned above, if you’re using spreadsheets and other manual processes to manage your invoices, your collectors really do not have the time they need to focus the tasks that help you get paid. A/R automation truly can make a difference in your performance, this is a fact made evident by a study that compared how collectors spend their time when they are using manual strategies vs. those who use automation software. The report shows that companies who utilize A/R software are spending 3X as much time on value-added tasks like talking with customers about payment, not updating spreadsheets, looking for information, or prioritizing their to-do list.
The study also found that with more time to focus on important tasts, companies who automate A/R recognize benefits such as:
- 20 percent reduction in DSO
- 25 percent reduction in past due receivables
- 15 to 25 percent reduction in bad debt reserves
- ROI in as little as two months (try this ROI calculator to see how much you'll save)
With these tactics you will be well on your way to improved A/R performance, but this is by no means an exhaustive list of the ways you can start getting paid faster. Pick up more tips, tricks, and best practices here or follow us on twitter @e2bteknologies.