When a business sells goods or services, customers don’t necessarily pay right away. Many organizations have an accounts receivable process to track money that customers owe. Whether the business bills on a monthly basis or uses payment plans, accounts receivables allow customers to defer payments.
Managing accounts receivable can be challenging. The following myths can make this process even more daunting.
Myth #1: Having an Outstanding Accounts Receivable Balance Is Bad
One of the key performance indicators of your accounts receivable process is your AR turnover ratio. A high AR turnover ratio indicates that you’re likely to be flexible with payment terms and extend credit to customers. A low turnover ratio means most customers pay invoices right away.
A high AR turnover ratio means you’re taking risks. It’s a negative thing if you have a low collection rate but operating with a high AR balance isn’t necessarily a bad thing.
Extending credit to customers makes you competitive. With supply chain challenges affecting businesses, offering flexible payment terms can attract customers who are exploring alternatives.
Plus, offering flexible payment terms allows customers to improve their cash flow. It’s a factor that can support long-term growth and position your organization as a partner for success. The key is to nurture these relationships to remain their preferred supplier as these businesses grow.
A high AR balance isn’t necessarily a negative thing, but it’s important to find a balance. You can attract customers with credit and flexible payment terms, but you need to have thresholds in place to maintain your cash flow. You can, for instance, adjust available credit based on your current AR balance.
Myth #2: Managing Accounts Receivable Is Overly Complicated
Accounts receivables can be a complex process to manage. Managing credit, collecting payments, keeping track of recurring payments, and contacting customers with overdue invoices can be time-consuming.
An ERP can facilitate this process, but it’s not the only tool you’ll need. You’ll get better results if you invest in accounts receivable software.
Using a tool dedicated to accounts receivable will help you build a more effective process. You need features designed for managing credit lines and keeping track of payments. A simple accounting tool designed to manage your cash flow will typically lack the advanced features you need to manage your AR process.
Hiring an account receivable specialist might be difficult given the 3% decline in employment in this sector. Outsourcing this process is an alternative worth considering.
Myth #3: Accounts Receivables Are Only for Large Businesses
Accounts receivables are a more common practice among large organizations for two reasons:
- These businesses have the resources available to hire an accounts receivables specialist and manage this process.
- Large businesses have a larger customer base, which means they’re more likely to deal with customers who need flexible payment terms.
As a small or medium business, you can stand out in your niche by offering flexible payment terms. Plus, tools like accounts receivable software make it possible to manage an AR process with limited resources.
Adopting an accounting system that uses accounts receivables can be a factor for growth since you’ll be able to attract more customers and your customers might place larger orders if you offer credit.
Myth #4: Your Collection Rate Depends on Your Customers
Bad debt is a reality of accounts receivable. Businesses have a median percentage of delinquent accounts of 15%. At any given time, you’re likely to have a few accounts that are overdue.
Many business owners see bad debt as a result of working with bad customers. While some situations are the result of bad faith from the customers or issues with the customer’s accounting department, it’s important to consider the fact that your AR department can be responsible for the problem.
These common mistakes can result in late payments:
- Your AR department isn’t proactive enough. Contacting customers as an invoice approaches its due date can make a difference.
- Your AR specialists aren’t doing enough to communicate with customers. Offering discounts, extensions, or payment plans can significantly improve your collection rate.
- Extending credit without doing a thorough check of the customer’s ability to pay is a common issue. Consider adopting stricter standards for extending credit if you have a low collection rate.
- Not having a clear process for dealing with late accounts can be an issue. Work with your AR department to develop best practices for contacting customers and adjusting payment terms.
- Setting goals and reviewing performance are also important. Set a target collection rate and keep an eye on how your AR department is performing to take action if you miss this target.
Myth #5: An Unpaid Invoice Is a Lost Invoice
Late invoices are becoming more common. Recent research shows that 10% of accounts are past 90 days due for 16 different industry segments.
Equipment lease and rental businesses and medical equipment suppliers have some of the highest rates of late payments.
Before you write off an unpaid invoice as bad debt, there are a few options to explore:
- Reach out to the customer and offer to extend the payment terms. A payment plan can be a good option as well.
- Selling unpaid invoices to a collection agency can help you recoup some of the costs of providing the goods or services.
- For large invoices, suing for non-payment can be a viable option. There are costs associated with getting legal help, but you can justify these expenses for a large invoice.
- Approach unpaid invoices as a learning experience. Take the time to review the details of the order and figure out why the customer didn’t pay.
Learning from unpaid invoices can help you identify future customers with a high risk of not paying, as well as mistakes you made while attempting to collect.
Myth #6: Invoice Factoring Is a Bad Option
Invoice factoring has some pros and cons. Fewer businesses are turning to this option and the market is going through a slight decline.
However, there are some advantages to invoice factoring:
- You can save time and money by outsourcing the collection process to your invoice factoring vendor.
- Invoice factoring means you won’t have to wait for payments. You can improve cash flow significantly.
- Bad debt and late accounts are now the responsibility of your invoice factoring vendor.
If you think that invoice factoring could be a good option for you, take the time to look for the right vendor. You need to find a partner who will deliver a positive experience when collecting from your customers.
Myth #7: Accounts Receivable Is a Separate Process
Keeping different business processes in silos is an outdated strategy. Modern businesses need to focus on collaboration and communication across departments and processes.
A common mistake is to keep accounts receivable separate from your sales and marketing teams. It’s important to establish ongoing communication between the two departments.
Your sales team needs to be knowledgeable about your accounts receivable policies so they can discuss payment terms with prospective customers and create clear expectations.
Data collected by the AR team can also help your marketing department identify the characteristics of customers who are likely to default on their invoices. You can also use this data to establish the profiles to prioritize when generating or nurturing leads to build a customer base with businesses that always pay on time.
Experts are seeing a strong connection between this type of data-driven approach and business success.
Myth #8: AR and a Positive Customer Experience Can’t Coexist
AR specialists sometimes have to be firm regarding a past due payment. However, this process doesn’t have to be a bad experience for your customers. In fact, ensuring a positive experience with the AR process can result in long-term relationships and more repeat sales.
The first thing you can do is improve communication with customers. Reach out before an invoice is due, and don’t hesitate to send reminders.
Something as simple as offering different channels to reach out to your AR team can make a difference. It can result in a more convenient experience for customers who can use the channel they prefer. You can also offer different payment methods.
Accounts receivable software is a valuable tool that can help your AR department streamline some tasks. They’ll have more time for interacting with customers and providing a positive experience.
Your accounts receivable department and customer service department should work closely together. It will ensure a more consistent experience when customers are in touch with your AR team.
Plus, your accounts receivable process can generate valuable data regarding returns. You can pass on this data to your customer service team to identify issues with quality or customer expectations.
These eight common myths can hurt your accounts receivable process. It’s possible to improve your collection rate, offer a better experience, and reduce costs associated with accounts receivables by building a modern process.
Adopting accounts receivable software is one of the first steps you can take to empower your AR team. Software allows AR specialists to automate some repetitive tasks. It also helps them identify the accounts that require attention and frees up valuable time they can use to communicate with customers.