What are some account receivables best practices? 

Maintaining an efficient and effective accounts receivable (AR) management system is crucial for a company’s financial health in today’s competitive business environment. The ability to manage invoices, process payments, and mitigate bad debt impacts an organization’s bottom line.  

Get twelve AR best practices to help your team excel at managing cash flow, promoting healthy customer relationships, and ensuring financial stability for your business. 

1. Use Electronic Billing & Online Payments 

Transit from paper billing and checks to an electronic invoicing system. This reduces the risk of lost invoices and simplifies payment tracking. Integrate your billing and payments to automate record-keeping, minimizing human error. Invoicing software with integrated payment processing allows clients to pay directly from their bill, automatically recording the payment and setting up systematic follow-ups for late payments. This keeps collections efficient and communications personalized. 

2. Use the Right KPIs 

Track key performance metrics to ensure your AR processes are effective: 

• Days Sales Outstanding (DSO): Aim to reduce the average time it takes to collect payment, ideally below 30 days. 

• Average Days Delinquent (ADD): Keep this as low as possible. If it rises, review your billing processes and staffing for collections. 

• Turnover Ratio: A lower ratio indicates quicker revenue collection. A high ratio suggests many open accounts with uncollected revenue, prompting a review of billing and collections processes. 

• Collection Effectiveness Index (CEI): Strive for a CEI close to 100%, indicating successful payment collection from clients. 

• Revised Invoices: Minimize the need for invoice revisions. Frequent revisions indicate potential inefficiencies or errors in your billing process. 

•  

3. Outline Clear Billing Procedures 

Document your billing process to ensure consistency. Include billing periods, invoicing dates, necessary invoice information, record-keeping procedures, periodic assessments, and collections procedures for overdue payments. Also, document client-specific billing details and contact information to streamline communications. 

4. Set Credit & Collection Policies — and Stick to Them 

If you extend credit to clients, set clear policies to avoid overextending. Establish proactive AR collection policies, focusing on reminders before due dates to maintain open communication. Remind clients of all past due invoices with each new invoice to streamline collections and avoid confusion. 

5. Collect Payments Proactively 

With clear procedures, be proactive about collecting payments. Contact clients immediately when a payment is late, outlining steps for payment. Use electronic billing systems to automate follow-ups, ensuring timely collections without manual tracking. 

6. Set up Automation 

Automate repetitive tasks like preparing emails and pulling invoices to save time and add consistency. AR automation software can significantly reduce the time spent on cash collection. Automate emails for invoices, thank you, and payment reminders to improve efficiency and ensure timely payments. 

7. Make Payments Easy for Customers 

Simplify the payment process by addressing technical issues that hinder payments. Use electronic invoicing systems and online payment portals to make payments convenient for clients. Clear, accessible payment options foster good customer relationships and ensure timely payments. 

8. Involve All Teams in the Process 

Include all client-facing teams, such as sales, in the cash collection strategy. Sales teams play a critical role in ensuring closed deals convert into cash. Collaboration among departments enhances efficiency, reduces redundancies, and resolves issues quickly. Each stakeholder’s unique relationship with customers helps tailor approaches to ensure timely payments. 

9. Strong Password Policies 

Enforce complex password policies requiring regular changes to reduce the risk of security breaches. Strong passwords help protect sensitive AR data from unauthorized access. 

10. Audit and Monitor Access 

Regularly audit and monitor access to detect inappropriate or abnormal behaviors that may indicate security incidents. Proactive monitoring ensures timely responses to potential threats. 

11. Data Minimization 

Collect and retain only the necessary personal information required for operations. Minimizing data reduces the risk of exposure and helps maintain client trust. 

12. Compliance with Regulations 

Ensure compliance with legal requirements and standards guiding your access control policies and procedures. Staying compliant protects your business from legal repercussions and enhances your reputation. 

Implementing these best practices ensures secure and efficient management of your accounts receivable process, minimizing the risk of unauthorized access and maintaining the integrity and confidentiality of sensitive information. This approach not only improves cash flow but also strengthens customer relationships and financial stability.