Handling B2B sales means managing a lot of moving parts. As your business grows, so does the number of invoices you need to send, track, and follow up on. As much as we want our businesses to succeed at scale, accounts receivable management for a growing company can quickly become too complex to handle manually.
At the same time, effective accounts receivable management is vital to the health of any business — it ensures you get paid (in the right amounts and in a timely manner) for the goods or services you provide. This is not a task you can afford to put on the backburner.
Luckily, with the right policies and best practices (and maybe a little help from some software), you can have accounts receivable running smoothly no matter the size of your business. Keep reading for everything you need to know.
What is accounts receivable management?
Accounts receivable (AR) refers to all the payments owed to a business by its customers. Accounts receivable management is the process of, well, managing all those payments. AR management generally includes:
- Following up on late payments
- Setting payment terms
- Collecting debt
- Reconciling customer payments with outstanding invoices
- Resolving payment disputes
To put it simply, AR management is the process your business uses to make sure payments for its goods or services are made on time, consistently, and reliably. Good AR management should minimize past-due accounts, and reduce the time and energy you or your employees need to spend making sure you get paid.
Why is accounts receivable management so important?
There are many reasons AR management is a central part of business management, and vital to the overall health of your company.
AR management maintains healthy cash flow
Cash flow is key to maintaining the liquidity you need to pay your staff, order inventory, buy new equipment, and invest in growth. If your cash is tied up in your balance sheets because of bad AR management, your company could be forced to borrow to stay afloat, which means losing profits to interest and financing charges.
AR management builds better customer relationships
While the central goal of any AR process is to make sure your business gets paid, having clear, consistent policies in place will help your business maintain healthy relationships with its customers. Having good customer relations also helps build your business's reputation, ensuring you don't miss out on future deals and new customers.
AR management affects your ability to grow and scale
We already know about the direct impact AR management has on cash flow, which is essential for growing your business. But its impact on your ability to grow and scale goes even deeper — bad AR management could impact your relationship with investors, who will look to your balance sheets and record for collecting payments to see whether your business is in good health and a good candidate for their portfolios.
How to measure the health of your accounts receivable management
In an ideal world, a business has formal AR management processes that guide its finance team on when to invoice customers, how much to bill them, and when and how to collect. But that's not always how it works in the real world. Some businesses struggle to manage accounts receivable as their customer list grows. Some fail to effectively enforce their AR policies. And some never adopt good policies in the first place.
Looking for a health check on your accounts receivable management? Assessing the current state of your company's AR is twofold: You'll need to check for red flags that you already have AR problems, and you’ll need to establish the right KPIs to help you keep a finger on the pulse of your AR management in real-time.
5 accounts receivable red flags to watch for
1. Low cash on hand
When you're running a business, new capital is expensive — that's why businesses should never risk letting any of their existing capital go to waste. Without good accounts receivable processes and management, you can trap valuable capital in your balance sheets, robbing your own business of the cash flow and liquidity it needs to fund growth, reduce debt, lower costs, and outperform the competition.
2. Not billing on time
Good AR management practices make sure invoices go out to customers within the time set forth in their contract or payment terms. If customer billing is delayed, it means payments will likely be delayed, too, which can further impact cash flow and liquidity.
3. Not collecting on-time payments
Collecting payments on time can be tricky, since it isn't something your business has total control over. However, good AR management should reduce late payments, as well as the time your team spends following up with customers who are behind on their invoices. If your company isn't collecting payments consistently, it puts you at risk of bad debt that needs to be sold to a collection agency or written off for non-payment.
4. Errors in invoices and billing
By some accounts 61% of all late payments occur due to incorrect invoices. If you're making errors on invoices or billing, it could be costing you both time and money — and indicate a more serious issue with your AR management practices.
5. Being overwhelmed by the number of invoices and payments
As your business grows, so will your roster of customers, meaning you'll have more and more invoices and payments to keep track of. A straightforward red flag that might indicate that it's time to take a closer look at your AR management is if you or your team are overwhelmed by invoices and payments, or feeling like you're falling behind the ball on accounting processes. This red flag could indicate that you simply don't have the right tools in your AR management arsenal — but more on that later in this article.
4 accounts receivable KPIs to track
The other part of assessing the health of your accounts receivable management practices is knowing which key performance indicators to keep an eye on. Even better if you can use a dashboard tool to view all these metrics in one place.
1. Days sales outstanding (DSO)
DSO is one of the most common AR metrics, and for good reason — knowing the average number of days it takes you to collect payments allows you to keep a close eye on your overall cash flow. This metric can also point you in the direction of customers who frequently miss their invoice due dates. Note that a low DSO ratio isn't necessarily the goal (or even possible in every industry). Instead, you want a ratio that matches your payment terms as closely as possible, which would indicate that your collection process is working as intended.
To calculate: Choose a time period. Divide the total number of accounts receivable during that time period by the total dollar value of credit sales during the same period. Then, multiply by the number of days in the time period.
A "good" DSO varies according to your industry or type of business, but a number under 45 is generally considered good for most businesses.
2. Average days delinquent (ADD)
Average days delinquent is a simple metric to calculate — all you need is the due date and the paid date of your receivables. This is a good top-level metric for seeing how your collections management is performing at a glance.
To calculate: Start with your DSO. Then, calculate your best possible DSO by dividing your current accounts receivable by your total annual credit sales and multiplying by 365 days. ADD = DSO minus your best possible DSO.
A "good" ADD is the lowest number possible; this indicates that customers are paying their invoices quickly.
3. Percentage of current accounts receivable
This is another high-level metric that makes it easy to quickly see if your accounts receivable collections are working effectively, or if your organization has a problem with past-due accounts. This metric can help you zero in on customer invoices that are past due, so you can work to get to the bottom of the problem.
To calculate: Divide your number of current accounts receivable by the total number of accounts you have. Multiply by 100 to get a percentage.
The higher this number is, the better. A low percentage of current accounts receivable indicates that a higher number of accounts are past due, which can negatively impact cash flow.
4. Collections effectiveness index (CEI)
To avoid cash flow problems, it's essential to have a deep understanding of where your collection process falls short — and how to close any gaps. That's where CEI comes in; it measures how effective your team is at securing overdue payments within a specific time period.
To calculate: Choose a time period (generally a month), and find the beginning receivables and total credit sales for that time period. Add the beginning receivables and total credit sales, then subtract the ending total receivables. This is value A. Then, add the beginning receivables and total credit sales, and subtract the ending current receivables. This is value B. Divide value A by value B and multiply by 100 to get a percentage.
This metric should be as close to 100 as possible, since that indicates you are effectively collecting on customers' accounts. If this number falls too low (ideally it should be above 80% at all times), that indicates there's definitely a problem, whether that's with your customer health, team effectiveness, capacity, or something else.
5 ways to optimize accounts receivable management
Whether you've already identified opportunities for improvement in your company's accounts receivable management or you want to be proactive about optimizing your AR processes before any problems arise, these five actionable steps can help take your AR management to the next level.
1. Create a clear customer credit approval process
The first step to avoiding past-due customer accounts is having a clear process for approving customers for credit.
To do this:
- Set clear limits and requirements for issuing credit. Convey these policies to both your finance and sales teams, and make sure they can't be overridden without pre approval.
- Develop an internal scorecard to help assess a customer's credit limits. A customer buying low volume on short terms might have lower creditworthiness requirements and credit terms than a customer who wants to purchase large volumes on a more regular basis.
- Regularly review your credit approval process. If you see your percentage of current accounts dropping, that's a good indication you may need to reassess this process.
2. Keep data consistent and transparent
Customer master data refers to all the data your business needs to handle a customer's account: their payment terms, any discounts applied to their account, credit limits, delivery instructions, etc.
A huge challenge for scaling B2B businesses is keeping master data consistent, transparent, and up-to-date across the organization. For example, if sales and finance teams both manually enter master data in different formats, it can be difficult to know where the most accurate and up-to-date data lives.
For this, you need a single source of truth for customer master data. Choose a master data management system that's cloud-based and updates in real-time, so you can eliminate questions about which version of your customer data is most up-to-date.
Similarly, don't edit invoices; if changes are needed, void the incorrect invoice and send a new one. This helps avoid customers making payments based on incorrect invoices. And always invoice in a way where the PO, invoice, and bill of lading will match. That means, for customers with multiple locations, you should send multiple invoices to allow for better tracking and auditing. Rather than consolidating invoices, use a system that sends a monthly statement of account.
3. Tighten up account reconciliation
When payments come in, it's absolutely critical that they be applied not just to the correct customer, but to the correct invoice. Reconciliation also needs to be as timely as possible, so you always know which accounts are up-to-date, and which have outstanding balances.
Some ways to level up your business's cash application process are:
- Applying payments to specific invoices, rather than just to customer accounts.
- Applying payments to the correct invoice, not necessarily just the oldest one.
- Applying payments on the day they're received, so accounts stay as up-to-date as possible.
- Following up on unidentified cash receipts, rather than leaving them in a suspense account.
4. Use data to inform collections processes
If your account reconciliation and cash application processes are in good shape, then you'll have the right data to be proactive about collecting payments. Having up-to-date data reporting means knowing exactly which accounts are paid, which are outstanding, and which are in danger of defaulting. Then, you or your team can follow up on late payments or bolster their collections efforts as needed.
5. Automate accounts receivable management with Streamlined
Billing and invoicing may seem straightforward, but many businesses struggle to send out error-free invoices in a timely manner, especially if they have a lot of customers to manage and a lot of orders to bill for. Accounts receivable automation can help, and Streamlined is providing smart, simple invoicing engineered to help your business get paid three times faster.
Consider this: Businesses who rely on manual processes for accounts receivable take 67% longer to follow up on overdue payments.
But with Streamlined, your team can save 20-30 hours per week on operations. That's because our accounts receivable management solution automates invoicing, matches payments to invoices, syncs with platforms like Shopify, and integrates seamlessly with most accounting software. All you have to do is sit back and watch your payments come in.
But what's more is that Streamlined can help optimize your accounts receivable management in every way we've mentioned so far.
- Create a clear customer credit approval process. Streamlined can onboard your wholesale customers, including setting payment terms and methods.
- Keep data consistent and transparent. Streamlined automatically generates a customer-facing statement of account, so customers can see all their invoices, transparently, in one place.
- Tighten up account reconciliation. Streamlined reconciles every payment to an invoice and integrates with your existing accounting software to save you time and effort.
- Use data to inform collections processes. Since the right payments go to the right invoices automatically, you can keep a closer eye on past-due accounts and focus collections efforts where they'll have the most impact.
Streamlined can handle whatever payment options you already accept — check, ACH, debit and credit card payments — so your customers can keep sending payments however they're most comfortable. And for keeping track of the KPIs that help make sure your AR management is on the right track, Streamlined offers real-time charts that show your aging balance, average payment times, monthly sales, and more.
The bottom line: Streamlined is how B2B businesses save time on accounts receivable management and get paid 3x faster.
If accounts receivable management isn't where you want to spend all your time, make it easy, fast, and intelligent with the right tool: Streamlined.