Essential tips for efficient Managed Accounts Receivable

Corcentric

Accounts receivable management (and Managed Accounts Receivable, but more about that later); For any business, this is where the money you’ve earned is waiting to be collected. Managing AR efficiently isn’t just an accounting chore; it’s the bedrock of your cash flow. If your receivables are piling up or getting paid late, your cash flow tightens, and operational flexibility goes out the window.

With many businesses operating in a credit-heavy environment, AR management becomes a crucial focal point. Keeping that cash flowing on time is more than just good business practice — it’s survival.

But AR management is about more than just timely payments. It reflects your company’s financial health and stability. A business weighed down by overdue receivables faces growth limitations, strained creditworthiness, and an overall precarious financial position. In today’s competitive and fast-paced market, having a robust AR strategy can be the difference between thriving and barely hanging on.

So, let’s walk through some essential tips for improving your accounts receivable management — whether it’s enhancing customer payment experiences, setting credit standards, or utilizing the power of data analytics to stay ahead. By taking a proactive approach, you not only strengthen your AR process but also build better relationships with your customers and, most importantly, position your business for long-term success.

This isn’t just theory—it’s what your business needs to stay competitive in 2024 and beyond.

What accounts receivable (AR) management is all about

Effective AR management starts with understanding its purpose — receivables represent the money your customers owe you for products or services delivered. The process of collecting those payments needs to be smooth and timely to maintain a healthy cash flow. Every day an invoice goes unpaid increases your risk. And if your receivable processes are bogged down by inefficiencies, those risks multiply.

The good news? We’re in a digital age, and AR management can be more centralized and accessible than ever. With the right digital tools, businesses can track outstanding invoices, monitor payment patterns, and streamline the entire receivables process. Centralized AR management systems provide visibility and data-driven insights that help you understand your customers’ payment behaviors and allow for more strategic decision-making.

Providing multiple payment options, such as credit cards, electronic invoicing, and online payment portals, is another crucial part of the puzzle. Offering flexibility reduces friction and makes it easier for customers to pay, cutting down on late payments and optimizing your cash flow. If they can pay you faster, you can operate smoother — it’s that simple.

The key metrics that keep AR on track

When it comes to keeping your AR management on point, measuring your performance is crucial. Here are a few metrics that provide insights into how effectively your AR process is running:

Days Sales Outstanding (DSO): This measures the average time it takes to collect payment after a sale. A lower DSO means your cash is coming in faster, while a higher DSO may signal potential issues in the payment process.

Accounts Receivable Turnover Ratio (ART): This tells you how quickly your receivables are converted into cash over a specific period. A high turnover ratio indicates efficient receivables management, while a lower ratio suggests potential inefficiencies.

Collection Effectiveness Index (CEI): This metric shows how effective your collection process is in recovering overdue payments. A higher CEI reflects strong receivables management, while a lower index signals a need for improvement in collection strategies.

Why effective AR management is critical for financial health

At the heart of your company’s liquidity lies the ability to collect receivables on time. This isn’t just an issue of keeping the lights on; it’s about having the operational flexibility to respond to business needs, take advantage of growth opportunities, and avoid unnecessary debt. A well-managed AR process ensures that payments are collected promptly, reducing cash flow gaps and the need for external financing.

In practice, this means avoiding the headaches that come with overdue payments. If you can’t collect payments on time, you can’t pay your bills on time, which can ripple through your entire business. Suppliers start demanding faster payments, credit becomes more difficult to secure, and suddenly, growth is out of the question. On the flip side, efficient AR management helps to quickly resolve disputes and discrepancies in invoicing, accelerating payments and ensuring your balance sheet stays in the black.

Key strategies for optimizing AR management

To stay ahead, businesses need to take a proactive approach to AR management. This means setting clear payment terms, automating processes, and improving customer communication. Below are some essential strategies to keep your AR process running smoothly:

Define clear payment terms: Be explicit with your payment terms. Whether it’s net-30, net-60, or payment upon receipt, make sure your customers understand when their payment is due and what happens if they miss the deadline.

Offer multiple payment methods: In today’s world, payment flexibility is king. From traditional methods like checks to online portals and credit cards, giving customers the option to choose how they pay you can lead to faster payments.

Automate payment reminders: Don’t leave it to chance. Automated reminders sent before and after payment due dates can significantly reduce late payments without requiring additional manual effort.

Optimize your collections process: Review your collections process regularly to ensure it’s both efficient and customer friendly. It’s possible to collect overdue payments without burning bridges.

Enhancing customer payment experiences

Customers today expect convenience — and that extends to how they pay their bills. One of the most effective ways to improve AR management is by making the payment process as seamless as possible for your customers. Here’s how:

Set clear expectations: Defining payment terms, such as “net-30” or “due upon receipt,” creates clarity and prevents misunderstandings about when payment is expected.

Provide multiple payment options: Today’s customers want flexibility. By offering options like credit cards, mobile payment platforms, or direct transfers, you’re making it easier for customers to settle their invoices on time.

Increase transparency: Keeping customers in the loop with up-to-date information about their payment status fosters trust and makes it easier for them to manage their own accounts.

Align finance with customer service: A good AR process should support your overall customer service goals. Disjointed communication or handling can leave a bad impression and affect customer loyalty.

Table 1: Payment Terms Overview

Payment Terms	Description
Net-30	Payment due 30 days after invoicing
Due upon receipt	Payment due immediately upon receipt of the invoice

Streamlining dispute resolution

Disputes over invoices are inevitable, but they don’t have to derail your AR process. A well-organized dispute resolution strategy can turn a potentially long payment delay into a quickly resolved issue. Speed is the key—addressing disputes promptly prevents them from escalating and dragging down your cash flow.

By prioritizing disputes and maintaining open communication channels with customers, you can resolve issues faster. Consistent follow-ups with customers during disputes also ensure that you’re always working towards a solution.

Key steps to efficient dispute resolution:

Identify and prioritize disputes early: Quick identification allows for faster resolution, which minimizes the time receivables sit unpaid.
Maintain open lines of communication: A steady dialogue with the customer ensures transparency and keeps both parties aligned on next steps.
Follow up consistently: Regular follow-ups show the customer you’re serious about resolving the issue, helping to move disputes toward resolution faster.

Establishing clear credit standards

Credit management is where AR and risk management intersect. Offering credit to customers helps grow your business, but if you’re not setting clear credit standards, you could be putting your financial stability in jeopardy. Implementing credit policies that evaluate the creditworthiness of each customer is essential for reducing the likelihood of bad debt and overdue receivables.

Before offering credit, ensure you have a standardized credit application process that evaluates the financial stability of potential customers. Setting credit limits based on this evaluation not only helps manage risk but also fosters better planning on your end.

Table 2: Key Steps in Establishing Credit Standards

Key Steps	Description
Evaluation of creditworthiness	Assess the financial stability of each customer
Defining credit limits	Set appropriate credit limits based on risk
Standardized application process	Ensure consistency in extending credit

Utilizing data analytics to monitor AR performance

In today’s data-driven world, tracking key performance indicators (KPIs) is vital to understanding the health of your AR processes. Real-time analytics can give you insights into customer payment behaviors, helping you identify trends and make proactive decisions.

For instance, monitoring your Days Sales Outstanding (DSO) helps you see how quickly your customers are paying, and tracking your Collection Effectiveness Index (CEI) reveals how well your collection strategies are working. Using data analytics, businesses can also forecast future cash flow trends, ensuring they stay ahead of potential bottlenecks before they become a problem.

Table 3: AR Performance Metrics

Performance Metric	Importance in AR Management
Days Sales Outstanding (DSO)	Measures the average time for cash inflow
Accounts Receivable Turnover	Tracks the frequency of receivables-to-cash
Collection Effectiveness Index (CEI)	Measures the success rate of collections

The impact of automation in AR

While many companies have embraced AR automation, it’s worth considering whether automation alone can fully optimize your process. Automation handles many of the repetitive tasks — like sending invoices and payment reminders — freeing up your team for higher-value activities. However, automation also has its limitations.

For many businesses, especially those with complex customer bases, the personalized intricacies involved in collections and dispute management require a human touch that automation simply can’t provide. That’s where Managed Accounts Receivable services come into play, offering an expert, tailored approach alongside automation.

Which brings us to…

Managed AR vs. AR automation: What’s the right fit?

Everything you just read is essential for optimizing your AR management. At the same time, a better option may just be to leapfrog a lot of it and adopt Managed AR services instead. Let’s be clear — AR automation is fantastic, but there are limits.

Managed AR services can offer a human touch that fully automated systems just can’t replicate. It’s particularly helpful if you’re looking for personalized customer service, faster setup times, and dedicated resources to handle more complex receivables issues.

Managed AR provides a more comprehensive solution, going beyond software to include expertise in credit management, collections, and dispute resolution. With a Managed AR partner, you can still benefit from automation for routine tasks while leveraging specialized services to handle exceptions and manage more complex customer relationships.

If you’re trying to reduce your Days Sales Outstanding (DSO) or want to strengthen your collections process, Managed AR offers the expertise needed to streamline these functions without overburdening your in-house team.

For more insights on the balance between automation and Managed AR, check out this blog post on the case for Managed AR.

Training your AR staff for success

Another critical factor in AR success is the competence of your AR staff. Without proper training, even the best AR systems will fail to achieve optimal performance. Training your team to handle customer disputes, manage collections, and understand the nuances of credit management will pay off in the form of faster payments and fewer disputes.

In addition to understanding credit policies, your staff should be well-versed in how to communicate effectively with customers, issue timely payment reminders, and handle disputes with professionalism. This knowledge can be a game-changer when managing overdue payments and maintaining customer relationships.

Reviewing and adjusting AR policies regularly

Lastly, the AR landscape is dynamic, and your policies should reflect that. Regularly reviewing your AR processes and credit policies allows you to make adjustments based on changes in customer behavior, market conditions, or internal financial goals. By keeping your AR policies flexible and responsive, you can avoid bottlenecks in the receivables process and continue optimizing cash flow.

Table 4: Elements of AR Policy Review

Element	Description
Credit policy	Evaluate customer creditworthiness periodically
Payment terms	Set clear, adaptable terms based on cash flow
Billing accuracy	Ensure invoicing is accurate and dispute-free
Payment reminders	Automate reminders to reduce overdue payments

Building strong customer relationships

At the end of the day, AR management is as much about customer relationships as it is about cash flow. By focusing on open communication, clear payment terms, and a customer-first approach, businesses can improve payment timeliness and reduce disputes.

When disputes arise, an open dialogue can resolve issues before they escalate. In many cases, customers appreciate a transparent, collaborative approach and will be more willing to honor their payment terms if they feel supported rather than harassed. Strong customer relationships help ensure timely payments and foster loyalty, which can lead to more business opportunities down the line.

Conclusion: Taking control of AR for financial stability

Efficient AR management is the backbone of any healthy business. By implementing clear payment terms, embracing automation, investing in your AR staff, and maintaining strong customer relationships, you can optimize your AR process and significantly reduce your Days Sales Outstanding. This leads to more predictable cash flow and fewer bad debts — two things every business should strive for.

To dive deeper into the strategies that can take your AR process to the next level, download The Ultimate Guide to Accounts Receivable Management and start strengthening your AR today.