Receivable Management: Defnition, Objective, Process Flow, Best Practices

Did you know that businesses lose, on average, 1.8% of their annual revenue to bad debt? Scary, isn't it? Receivable Management is your financial superhero, diving in to slash that percentage and boost your bottom line. By managing receivables, businesses prevent the perils of overdue or non-payment and fortify their financial foundation and liquidity position. This blog will discuss Receivable Management and how to do it for your business.

What is Accounts Receivable?

Accounts receivable represents money owed by a customer to a business for goods or services purchased on credit. This debt arises when the service provider issues an invoice to the customer. The debt can be short-term (less than a year) or long-term (more than a year). Effective accounts receivable management is crucial to ensure timely payments and maintain healthy cash flow.

Examples of Accounts Receivable

• Unpaid invoices for products purchased on credit in a store.
• Outstanding payments for services rendered, like consulting fees or repairs.
• Balances on customer accounts for credit extended, such as phone bills or credit card statements.

What is Receivable Management?

Receivable management or accounts receivable management is the strategic process of ensuring customers make timely payments. It is paramount in maintaining a healthy working capital for businesses and preventing overdue or unpaid customer invoices. 

Objective of Receivables Management

The main objective of receivables management is to efficiently convert outstanding payments from customers into liquid assets, thereby minimising the negative impact on cash flow and working capital. It's like turning "paper promises" into hard cash. Here are the main objectives -

1. Maximize Cash Flow: The primary goal is to minimise the lag between providing goods/services and receiving payment. This promotes healthy cash flow, allowing your business to operate smoothly and pay its own bills on time.
2. Reduce Days Sales Outstanding (DSO): DSO measures the average time customers pay their invoices. Lower DSO translates to faster cash inflow and improved financial stability.
3. Minimize Bad Debt: Unpaid invoices become bad debt, impacting your bottom line. Effective receivables management aims to prevent bad debt and write-offs through proactive strategies.
4. Optimize Working Capital: By accelerating cash collection, you free up working capital for investments, expansions, or covering operational expenses.
5. Maintain Positive Customer Relationships: While collecting payments is critical, good receivables management prioritises open communication and customer understanding. This fosters long-term positive relationships and encourages prompt payments.

Receivables Management Process Flow

1. Establish Credit Practices:

• Set credit limits: Determine the maximum amount of credit you're willing to extend to each customer based on their creditworthiness.
• Conduct credit checks: Verify customer credit history to assess their ability to pay.
• Communicate terms clearly: Ensure customers understand payment terms and deadlines.

2. Issue Invoices:

• Create accurate invoices: Include customer information, product/service descriptions, quantities, prices, payment terms, and due dates.
• Send invoices promptly: Deliver invoices to customers promptly, either electronically or through physical mail.

3. Track Accounts Receivable:

• Monitor outstanding invoices: Record payments and track invoices that remain unpaid.
• Send reminders and follow-ups: Gently remind customers of upcoming or overdue payments, encouraging prompt settlement.

4. Process Payments:

• Receive payments: Collect payments via various methods (e.g., checks, credit cards, bank transfers, online payments).
• Record payments accurately: Update accounts receivable records to reflect received payments.

5. Reconcile Accounts:

• Compare records: Regularly verify that your accounts receivable records match your bank statements.
• Resolve discrepancies: Investigate and address any differences to ensure financial accuracy.

6. Manage Collections:

• Follow-up on overdue accounts: Contact customers with past-due invoices to initiate payment arrangements.
• Consider collection actions: If necessary, escalate collection efforts to recover outstanding debt.

7. Generate Reports and Analyze Data:

• Produce reports: Track critical metrics like receivables ageing, average collection period, and bad debt percentage.
• Identify trends and insights: Use data to evaluate the effectiveness of your receivables management process and identify areas for improvement.

8. Customer Relationship Management:

Effective CRM involves two major stages -

• Open Communication:

• Proactive Outreach: Regularly update customers on their account status via email, text, or phone calls.
• Multiple Channels: Provide various communication options for customer preferences (e.g., online portal, email, phone).
• Personalised Interactions: Address customers by name and actively listen to their concerns.
• Transparency and Clear Explanations: Be transparent about late fees, payment options, and collection procedures.

• Addressing Inquiries and Concerns:

• Timely Response: Aim to respond to customer inquiries within 24 hours or less.
• Empathetic and Solution-Oriented Approach: Acknowledge customer frustration and proactively offer solutions.
• Document Interactions: Keep track of all communication records for future reference.
• Escalation Process: Establish a straightforward process for escalating unresolved issues to relevant individuals.

9. Compliance and Legal Considerations

• Accounting Standards

• Accurate Recordkeeping: Maintain accurate and up-to-date records of all invoices, payments, and ageing receivables.
• Internal Controls: Implement internal controls to prevent fraud and errors.
• Reporting: Generate accurate and timely reports for stakeholders and financial audits.

• Legal Regulations

• Fair Debt Collection Practices Act (FDCPA): Understand and comply with regulations regarding contacting debtors.
• State-Specific Laws: Be aware of additional regulations specific to your location.
• Ethical Collections Practices: Avoid deceptive or harassing tactics when collecting debts.

10. Continuous Improvement

• Regular Process Review: Schedule periodic reviews of the receivables management process to identify areas for improvement.
• Performance Metrics: Track critical metrics like Days Sales Outstanding (DSO), average collection period, and bad debt percentage.
• Benchmarking: Compare your performance to industry averages and best practices.
• Technology Adoption: Utilize tools like automated invoicing, online payment portals, and data analytics to streamline processes and gain insights.

Remember: Early intervention and clear communication are key to efficient receivables management. Optimise your process, stay organised, and be proactive to keep your cash flow healthy!

Tips to Optimize Receivable Management

1. Check the client's solvency. Before providing a service, especially an expensive and lengthy project, check the client's credit history to verify their solvency.
2. Establish and detail payment conditions. Indicate the payment due date on your invoice or purchase order. Avoid using ambiguous formulas such as "Upon receipt of the invoice" or "Since receipt of the invoice." Otherwise, it will be the clients who will set the payment date.
3. Improve your organisation. Store all accounting-related information in an invoicing tool with an accounts receivable chart. You can use MS Excel spreadsheets if you don't want to invest in accounting management software. Create a list of all invoices issued, and make sure you have indicated the invoice number, date, amount and customer name.
4. Make sure the customer confirms receipt of the invoice. After sending an invoice, the first thing is to contact the client to ensure they have received it and have all the information to make the payment.
5. Create reminders. Managing a business involves carrying out many tasks; for this reason, organisation and efficiency are essential. Use tools like Google Calendar to send reminders to the client with pending invoices.
6. Be flexible with payment methods. Offer the customer different options to make it easier to make payment. You can provide your account information to make a transfer or even enable online payment systems such as PayPal.
7. Ask for an advance. This practice is especially recommended for new clients. You can also ask them to pay you immediately after the service/product is delivered. To maintain the company's solvency, assets must exceed liabilities to have a solid financial cushion.
8. Don't do business with customers who haven't paid yet. To protect your finances, it is better to temporarily interrupt collaboration with delinquent clients and wait for them to pay off their debts.