Receivables management or accounts receivable management is the practice of successfully managing, handling and regulating a company's outstanding customer invoices or credit sales․ For any company it is critical to ensure a proper accounts receivable management process as it has a direct impact on a company’s cash flow, profitability and liquidity.
The main objective of accounts receivable management is to shorten the period between issuing invoices and receiving payments by rapidly collecting unpaid receivables. As a result, the company will have a consistent and stable cash flow. To mitigate the risk of bad debts or losses from late payments, it is advisable to assess the customer’s creditworthiness in advance.
Another important thing is to maintain good relationships with customers while handling payment issues effectively.
Key activities involved in accounts receivable management
To handle the accounts receivable management properly, there are some tips you should follow and include in your business strategy. One of them is related to credit policies. This may include determining credit limits for clients in accordance with their creditworthiness and industry trends.
“Collection in the business world is a puzzle. There’s four pieces. There’s usually sales, accounts payable, accounts receivable and contracts. One of the four pieces, if something goes left or something goes right, you have to figure out where the break down is.”
Dee Bowden
Author of Collect the Cash
It is important to provide accurate invoices to customers and verify their ability to pay through credit evaluation. Another important thing is to offer the clients payment method alternatives to make the process faster and simpler. Effective and consistent communication with customers can prevent late payments and build trust between the business and the customer. It is not only related to requesting payments on time but also maintaining strong relationship by understanding and satisfying the customer needs. This will lead to effective dispute resolution which in turn will alleviate delays in payment processes.
What’s interesting about receivables management is that the Pareto principle (80/20 rule) applies to it as well. In many circumstances, approximately 20% of a company's customers account for about 80% of its receivables. Concentrating on those clients and handling their accounts can have a significant impact on the overall success of receivables collection.
Thus, accounts receivable management is an important part of a company’s financial management. Continuous improvements and customer-oriented approaches are key to achieving success in receivables management while maintaining profitability and sustainable development.
Prepared by: Seda Janazyan, Business Analyst at CFOnline.co
