How to Manage Account Receivable effectively?

Accounts Receivables affect the cash flow of any organization. Slow customers would require you to draw down your cash reserves to sustain ongoing business operations. Besides, as customer account balance gets older, the probability of collecting those accounts diminishes.

Here are some of the best practices could improve the receivables process and thus help improve cash flow, and maintain a healthy bottom line:

Raising Invoices from the System

Nowadays most of the financial system facilitates issuing invoicing directly from the system on meeting a pre-determined criterion i.e. on delivery of goods or end of the month, etc. This will ensure your customers receive your invoices on time without manual intervention.  In addition, generating invoices through the system reduces the chances of errors in invoice preparation.

Multiple Online Payment Options

An increasing number of businesses are now receiving and paying using Electronic Funds Transfer. By specifying on your invoice that payment could be made electronically, you will enable your customer to deposit payment directly to your bank account. Always include your banking information and other online payment option (PayPal and/or Credit Cards options) on the invoice.

Credit Control

If you are going to extend a customer credit, assess their ability to pay. It is worth spending time and money assessing the creditworthiness of your customers than delayed / no collection of Account Receivables.  Keep in mind Credit Control is an ongoing process.  Many businesses make the mistake of doing the initial Credit Check and then assuming the situation would remain the same with Customers going forward.

Regular Review of Accounts Receivables 

It is of utmost importance to regularly review how to manage Account Receivables balances.  The regular review helps in timely follow-up and intervention as needed.  It is highly recommended to review the customer invoice aging daily.  A clear credit policy will help to help identify accounts that need follow-ups.

Follow-up of Overdue Payments

Once overdue accounts are identified, it is important to systematically follow up with the respective customer for the collection. The initial follow-up could be a gentle reminder leading up to legal action if the situation demands.

Keep a log of when follow-up calls or emails were sent, along with a record of customer’s responses to follow-up calls. This is invaluable in case of additional follow-up calls or any legal actions if needed

Incentivize or Restructure Account Receivables

Many businesses offer incentives to customers who make payments before the due dates.  The popular 2% discount for payment within 10 days could boost collection.  This creates a motivation in Customers to settle dues early.

In many cases management could also restructure the payment schedule (delay the payment dates) considering unforeseen difficulties faced by its customers.  This kind of restructuring is generally offered to existing customers and an element of interest could be added to cover finance costs.

Discounting / Factoring Accounts Receivables

Many commercial banks offer trade facilities to businesses.  Amongst the popular services are discounting/factoring how to manage Account Receivables wherein banks buy out receivables from the business at a discount.  This releases much-needed cash to the business. The costs involved are justified by greatly improved cash flows.