The success of your company's accounts receivable (AR) collection process can have a big effect on your bottom line. You might be wasting more time and money than you think if you're still battling antiquated practices and inefficiencies. Yes, your invoices are being sent out, your collections team is pursuing payments, but is it as effective as it could be?

As a CFO, it's tempting to adopt the mindset of "If it's not broken, why fix it?" This viewpoint, however, fails to consider the potential for improvement and the benefits that adjustments may bring. It's not just a matter of whether your current system functions; it's also a matter of realizing how much effective A/R management matters and how much more effectively it could function. When we talk to customers, we frequently discover that A/R processes are simple to overlook and that teams frequently do not prioritize fixing this aspect of their cash flow management.

This article will discuss the importance of efficient AR collection and how it affects the financial stability of your company. We'll look at seven methods and approaches that can help you streamline your AR procedures as well as some helpful tools.

Understanding Accounts Receivable Collection & The Importance

Accounts Receivable (AR) is the balance of money owed to a firm for goods or services delivered or used but not yet paid for by customers. In simpler terms, it's the money that your customers owe you. But it's not just about waiting for payments to roll in. Effective AR management involves actively pursuing timely debt repayments to maintain a healthy cash flow.

In a perfect world, every customer would pay their invoices on time, and your AR would be a smooth, self-managing process. But in reality, late payments, partial payments, and non-payments are all too common. This is where AR collection comes in. It's the process of pursuing outstanding invoices that have been billed to customers but not yet paid.

Inefficient AR collection can have a significant impact on your business. First and foremost, it can lead to cash flow problems. If you're not collecting payments promptly, you may not have the funds you need to cover your own expenses, such as payroll, inventory purchases, and overhead costs.

Moreover, the longer an invoice goes unpaid, the less likely it is to ever be paid. According to a study by the Commercial Law League of America, the likelihood of collecting on a delinquent account drops drastically the longer it remains unpaid. After just three months, the probability of collecting on a debt drops to 69.6%. (Source)

Collectibility Of Delinquent Commercial Debt

Credit: Commercial Law League of America

Inefficient AR collection can also take a toll on your team. Manual AR processes are time-consuming and tedious, leaving your staff less time for strategic, high-value tasks. Plus, chasing down payments can strain your customer relationships, potentially leading to lost sales and damaged reputation.

Chances are you already have some kind of process in place even if it’s informal. The question is though— how do you make it even more effective? In the next sections, we'll explore strategies and tools that can help you avoid these pitfalls and improve your AR collection.

Techniques and Strategies for Improving Accounts Receivable Collection

Improving your AR collection isn't just about chasing down late payments—it's about implementing proactive strategies to ensure timely payments in the first place. Effective A/R collection starts before an invoice is even sent. Here are seven tips to help you improve your AR collection:

1. Prompt and Clear Invoicing: The first step to getting paid on time is sending out invoices promptly and ensuring they're clear and accurate. Systemizing your invoicing and payment process can help streamline this task. AR software can automatically generate and send invoices, ensuring they go out promptly and are formatted correctly.

1. Relationship Building & Regular Follow-Ups: Don't wait until an invoice is overdue to follow up with the customer. Regular, polite reminders can go a long way in ensuring timely payments. You can automate this process with AR software that sends out reminder emails based on your preferred schedule.

In a recent video, Carlos R. Vega, CEO of Tesorio, emphasized the importance of relationship-building in the accounts receivable collection process. He shared examples from successful companies that have adopted a proactive and personal approach to their AR automation processes. For instance, Carla Buggs from Fastly has taken the time to get to know her AP counterparts at her customers on a personal level, tracking details like birthdays, children's names, and hobbies in Tesorio. This personal connection places her at the top of the list each payment run.

Vega also highlighted the strategy employed by Glen Olson & Michael Renner (ex Veeva Systems) and Jeremy Keenan & Will Young from Smartsheet. They all send their first email within a week of the invoice date, not to ask for money, but to introduce themselves and verify contact, PO, and invoice information. This approach allows them to build a strong relationship before any payment issues arise.

These examples underscore the value of introducing yourself to the client early on and building relationships. It's not just about collecting payments; it's about creating connections. As Vega puts it, "it's not really about collection, it's about connection." This mindset can transform the way companies approach their accounts receivable processes, turning them from a source of potential conflict into an opportunity for relationship-building and mutual understanding.

You can watch the full video here.

1. Offering Multiple Payment Options: The more payment options you offer, the easier it is for customers to pay. Consider offering online payments, credit card payments, and direct bank transfers to accommodate different customer preferences. Offering discounts for early payments or payment installments can also encourage timely payments.

1. Implementing a Credit Policy: A clear credit policy sets the ground rules for extending credit to customers. It should outline your payment terms, late payment penalties, and process for handling non-payment. Make sure your customers are aware of your credit policy from the outset.

1. Prioritizing Accounts: Not all customers are equal when it comes to AR collection. Prioritize your efforts

based on the size of the account, payment history, and relationship value. This can help you focus your resources where they're most likely to have an impact.

1. Negotiating Payment Plans: If a customer is struggling to pay their invoice in full, consider offering a payment plan. This can help you recover the debt over time while maintaining a positive customer relationship.

1. Outsourcing Accounts Receivable: If your AR processes are becoming too time-consuming or complex, consider outsourcing to a specialist. This can free up your team to focus on core business activities while ensuring professional AR management. As a last resort, if all other collection efforts have failed, you might consider using a collections agency to recover the debt.

Remember, improving your AR collection is a continuous process. Regularly review your strategies, measure their effectiveness, and make adjustments as needed. In the next section, we'll explore how tools and software can help streamline this process.

Tools and Software for Improving Accounts Receivable Collection

In the digital age, there's no need to manage your AR manually. A variety of tools and software are available that can automate your AR processes, saving you time and reducing errors. Here are some ways that AR software can benefit your business:

• Automated Invoicing: AR software can automatically generate and send invoices, ensuring they go out promptly and are formatted correctly.

• Payment Reminders: Automated reminders can be sent to customers based on your preferred schedule, reducing the need for manual follow-ups.

• Payment Tracking: AR software can track which invoices have been paid, which are overdue, and which are due soon, giving you a clear overview of your AR status.

• Reporting: Advanced reporting features can provide insights into your AR performance, helping you identify trends and make informed decisions.

One such tool is Tesorio, which offers a comprehensive AR management solution. With features like automated dunning, cash flow forecasting, and customer payment portals, Tesorio can help streamline your AR processes and improve collection rates.

Conclusion

All in all, navigating the world of accounts receivable can be complex, but with the right strategies and tools, it can evolve into a streamlined and efficient process. The best practices we've discussed, inspired by companies like Fastly, Veeva Systems, and Smartsheet, highlight the importance of personal connection, proactive communication, and the use of modern tools in managing accounts receivable.

Other tactics include:

• Prompt and Clear Invoicing

• Regular Follow-ups

• Offering Multiple Payment Options

• Implementing a Credit Policy

• Prioritizing Accounts

• Negotiating Payment Plans

• Outsourcing Accounts Receivable

Remember, the goal is not just to fix what's broken, but to continually strive for what's better. Reach out to Tesorio today to explore how much you can save and how much more efficient your AR processes can be. Because in the world of finance, as in life, there's always room for improvement.