How to Develop a Proactive Accounts Receivable Policy?

Is your cash flow feeling sluggish? I have a solution for you and that is a perfect AR strategy!

Money that is due to a company by its customers for products or services that were bought on credit is referred to as accounts receivable, or AR. In essence, it is a short-term loan being extended by the company to the client, with the expectation that payment would be made within a certain amount of time. When it comes to sustaining a good cash flow, having a strong AR balance is necessary. This may have a substantial influence on a company’s capacity to pay its bills, invest in development, and fulfil payroll obligations.

Nearly 25% of all invoices sent from business to business are past late. Accounts receivable policy helps to guarantee that payments from customers are made on schedule and maintains a steady flow of cash. Let’s get down and know more about how we can develop a proactive AR strategy!

Difference Between Reactive and Proactive AR Management

To control the present crisis and avoid further escalation, reactive is often utilized. Additionally, reactive is used to take measures based on feedback or problems that have been reported. Planning for future complaints or problems and taking preventative actions to avoid them is an essential part of proactive management.

Benefits of A Proactive AR Policy

• Improved Cash Flow: Describe how proactive AR reduces the amount of time it takes to collect payments and guarantees a consistent flow of cash coming in.
• Reduced Delinquency Rates: Emphasize how proactive methods such as early communication and automated reminders may greatly cut down on late payments.
• Enhanced Customer Relationships: Discuss how proactive communication and the provision of flexible payment choices may enhance customer connections and develop trust.
• Operational Streamlining: Describe how the automation of operations and the establishment of clear procedures free up important time and resources for use in other corporate activities.
• Better Decision-Making: Mention how proactive augmented reality data offers useful insights into the payment habits of customers, which enables informed credit choices to be made more effectively.

Building a Strong Foundation for Healthy Accounts Receivable

A robust account receivable (AR) system is the backbone of any healthy business. It ensures timely payments, minimizes bad debt and keeps your cash flow flowing smoothly. Here’s how to lay a strong foundation for your AR department:

Standardize Your Processes

Clear and consistent procedures are the cornerstone of an efficient AR system. Here’s what you need to focus on:

• Credit Approval: Establish a well-defined credit policy that outlines the criteria for approving customer credit limits. This helps mitigate risk and ensures you’re extending credit to customers who can pay.
• Invoicing: Standardize your invoicing process. This includes using clear and consistent templates that include all necessary information like product/service details, quantities, pricing, payment terms, and due dates. Timely and accurate invoices ensure customers understand their obligations and encourage faster payments.
• Record Keeping: Maintain meticulous records of all transactions, invoices, payments, and communication with customers. This data is vital for tracking outstanding balances, identifying trends, and resolving disputes effectively.

Embrace Automation:

Technology can be your greatest ally in streamlining accounts receivable policy. Consider automating repetitive tasks such as:

• Sending invoices electronically: This eliminates delays associated with traditional mail and allows for faster delivery and processing by customers.
• Generating reports: Automated reports provide valuable insights into your AR performance. Track key metrics like average collection times, ageing reports, and customer payment trends to identify areas for improvement.

Know Your Customers: Segmentation is Key

Not all customers are created equal. Here’s how understanding your customer base can improve your AR strategy:

Customer Segmentation: Group your customers based on factors like creditworthiness, purchase history, and payment behaviour. This allows you to tailor your credit terms, communication style, and collection strategies to each segment. For instance, high-value customers with a strong payment history might qualify for more flexible payment terms, while those with a history of late payments might require stricter credit limits and earlier communication regarding outstanding balances.

Identifying Credit Risks:

Early detection of potential credit risks is crucial for preventing bad debt. Here are some red flags to watch out for:

• Limited financial history
• Frequent late payments
• Declining credit scores
• Changes in customer behaviour or buying patterns

By implementing these strategies, you can build a strong foundation for your AR department, ensuring a healthy cash flow and a more efficient financial system. In the next section, we’ll delve deeper into specific tactics for collecting payments and managing outstanding balances.

Implementing Proactive Strategies for Healthy Accounts Receivable

Building a strong foundation is essential, but true AR mastery lies in proactive strategies that encourage timely payments and minimize delinquencies.

Early Communication is Key

Setting the stage for on-time payments starts with clear communication from the very beginning:

• Clear and Timely Invoices: As mentioned earlier, consistent and accurate invoices are crucial. Ensure they are sent promptly after a transaction and contain all essential details.
• Transparent Payment Terms: Clearly outline your payment terms on your invoices. This includes the due date, any early payment discounts offered, and any late payment penalties.

Offer Multiple Payment Options:

Make it easy for customers to pay by providing a variety of payment methods. Consider offering options like online payments, credit cards, debit cards, and bank transfers. This convenience can significantly improve payment speed.

Automate Reminders and Follow-Ups

Don’t wait for payments to become overdue before taking action. Leverage technology to:

• Automated Reminders: Set up automated email or SMS reminders that nudge customers about upcoming due dates or slightly overdue invoices. These gentle nudges can be highly effective in prompting timely payments.
• Escalating Overdue Accounts: For persistently overdue accounts, consider a tiered approach for follow-up. Start with friendly reminders, then progress to more formal communication methods like phone calls or letters.

Foster Open Communication

Clear and professional communication is vital throughout the collection process:

• Professional Follow-up: When following up on overdue accounts, maintain a professional and courteous tone. Explain the situation clearly and focus on finding a solution.
• Resolving Disputes: Be prepared to address any disputes regarding invoices promptly and professionally. Listen to the customer’s concerns and work towards a mutually agreeable resolution.
• Offering Payment Plans: For customers facing genuine financial hardship, consider offering flexible payment plans. This can help them settle their outstanding balances while minimizing the risk of bad debt for your business.

By implementing these proactive strategies, you can significantly improve your AR collection process, reduce delinquencies, and ensure a healthy cash flow for your business.

Technology and Tools for Proactive Accounts Receivable Management

Technology plays a vital role in streamlining AR processes and fostering a proactive approach to collections. Here are two key tools to consider:

AR Management Software

AR management software goes beyond simple automation. It acts as a centralized hub for all your AR activities, offering a range of benefits:

• Automated Tasks: Automate repetitive tasks like sending invoices, generating reminders, and applying payments. This frees up your staff to focus on more strategic tasks and customer relationships.
• Data-Driven Insights: Generate comprehensive reports that provide valuable insights into your AR performance. Track key metrics, identify trends, and make data-driven decisions to improve your collection strategies.
• Improved Efficiency: AR software streamlines workflows and simplifies communication, leading to a more efficient AR department overall.

Online Payment Portals

Make it easier for customers to pay on time by offering a secure online payment portal. Here’s how they benefit your AR:

• Convenience for Customers: Customers can make payments anytime, anywhere, through a secure and user-friendly platform. This convenience encourages faster payments and reduces the risk of late fees.
• Faster Payment Processing: Online payments are processed electronically, eliminating delays associated with traditional methods like checks or mailed payments. This translates to faster access to your funds.
• Reduced Administrative Costs: Online portals eliminate the need for manual processing of paper checks, reducing administrative costs associated with your AR operations.

By integrating these technological tools into your AR strategy, you can significantly improve efficiency, gain valuable insights, and ultimately ensure a healthier cash flow for your business.

Your Proactive Account Receivable Policy!

Don’t just chase late payments! A proactive AR policy ensures smooth collections from the start with clear procedures, open communication, and helpful technology. This means standardized processes, tailored communication for different customers, and easy payment options. Automated reminders keep track of payments, and open communication builds trust. Technology automates tasks and offers valuable insights, while online portals make payments a breeze.

Ready to take action? Contact NCRi today!