Seven Ways to Manage Accounts Receivable Efficiently
Efficient Accounts Receivable (AR) controls are an integral part of cash flow management that have serious repercussions on the company’s sales and profits. Accounts Receivable controls must be an integral part of any company’s financial management system. When cash flow problems surface on a regular basis, it is inevitably a sign that Accounts Receivables are poorly managed.
It is better to be prepared with solid policies and procedures and not be placed in the precarious position of repeated cash flow crises. Many companies tend to focus on their sales and marketing and neglect the cash management components such as AR and the associated credit policies, terms of payment, and timely AR collection procedures.Accounting Receivable outsourcing services falls under finance and accounting outsourcing. There are seven steps to efficiently manage Accounts Receivable:
1. Verification of the financial record and credit history of the customer:
Before any credit is issued to a customer a thorough check of the customer’s ability to pay and past record of payments to other suppliers must be ascertained. Before opening an account, the Seller should e-mail an application form that contains the corporate name and address of the Buyer, the names of at least three verifiable suppliers, and the customer’s detailed banking information. This information should then be verified through credit rating agencies such as CRISIL, ICRAor Dun & Bradstreet. All the listed suppliers on the application form should be contacted to verify their experience with the customer. Even after the verification process is completed, it may be prudent to ask for a COD (cash-on-delivery) payment for the first purchase when dealing with a small company.
2. Clear payment terms must be set:
Payments terms must be stipulated on all invoices and statements and clearly visible. The options for payments can be cash-on-delivery (COD), cash prepayment before delivery, net 30-60 days, 1-2% net 30 days (providing a discount of 1-2% if invoicesare paid before 30 days). For export purposes Letter of Credits are used where payment is secured by a bank, or a documentary credit where a promise to pay at a later date is supported by a bank. In general, the terms of payment depend on the creditworthiness of the Buyers.
3. Invoices must be integrated into the accounting software:
Must advance accounting software automate the invoicing process and electronically track orders from purchasing,to fulfilment, to shipping. Automatically produced reports that match purchase orders to invoices ensure timely issuance of invoices and are verified for possible omissions by the accounting department.
4. The advantages of multiple payment options:
Sellers must make it as easy as possible for Buyers to do business with them. Expediting payments in the internet era is facilitated by software that allow withdrawals to be made directly from the Buyers’ bank accounts or credit cards through secure intermediaries like PayPal, Stripe and many others. Even micro transactions can be made through mobile apps on smartphones. The use of both debit and credit electronic payment processors are ubiquitous everywhere. This greatly improves the speed with which money can be moved from Buyers to the Sellers. You can still pay the old-fashioned way – by cheque, and this is still the prevalent form of payment in some industries like construction.
5. The outsourcing option:
For many companies it may be well worth investing in external accounting services offered by reputable companies worldwide. Because accounting can be highly automated through state-of-the-art software, it can be offered from remote locations with much lower human resource costs. Many companies in advanced economies have turned to offshore accounting firms with confidence in the excellence of the services provided. Accounts Receivable collection is a particularly fastidious and time-consuming process that remote or offshore companies can handle with great efficiency and cost benefits.
6. Turning to collections as a last resort:
Sometimes the best efforts and systems of Accounts Receivable management hit a snag. Even the most trusted accounts may start procrastinating on payments, negatively impacting the cash flow of the Seller. Collection policies and procedures, as a last resort, are an integral part of efficient management. Collection procedures by phone, e-mail must be carefully scripted to avoid confrontations and promote payment. This is best left to internal or external experts.
7. Using payment terms as a form of AR control:
No payment terms should be seen as being permanently guaranteed. Companies must perform a regular evaluation of their customers’ payment records to see if they respect the payment terms granted them. Credit must be seen as a privilege that is continued only if it is respected. Buyers with negative payment records must be weeded out early and payment terms changed to curb repeated abuse.
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