How Businesses Can Overcome Typical Accounts Receivable Obstacles

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How Businesses Can Overcome Typical Accounts Receivable Obstacles

CFO Tech Outlook | Tuesday, November 02, 2021

The majority of firms have an accounts receivable policy in place that details when and how much to bill, as well as when to collect.

FREMONT, CA: While credit can be utilized to increase customer loyalty and base, giving these payment options without an excellent cash-flow plan in place can result in cash-flow concerns, even putting operations in danger. The following are some of the most often encountered challenges by Accounts Receivable staff:

DSO (Days Sales Outstanding) Exceeds the Industry Average

DSO is the average time required to convert credit sales to cash. A high DSO shows that clients defer payment on their commitments for an extended period, surpassing the specified payment term. If this KPI is higher than the industry average, organizations must ensure that the credit programs they offer are manageable. Additionally, it could be prudent to institute a new protocol and financial planning.

Tips for lowering the DSO:

- Create a strong collection strategy to guarantee that all invoices are sent out on time and with clear payment terms. Experts recommend that firms send invoices electronically rather than via mail to expedite billing and collections by asking clients to set up auto-pay or regular payments.

- Increase their payment options to make it easier for them to pay. Numerous studies suggest that increasing payment alternatives increases the likelihood that a bill will be paid on time. Businesses receive payment more quickly, but they also increase the likelihood of becoming a repeat customer.

- Provide incentives to consumers who pay on time and penalize those who do not. For example, if regular payment terms are up to 30 days, businesses may qualify for a discount if they pay within 10 days.

Disorganization of records

Organizing the invoices is critical for knowing how much money businesses owe, who owes it, and when they are expected to pay. Inadequate Accounts Receivables management can result in a cash-flow shortfall, which is why having a system that enables complete visibility is critical for responsible AR management.

Tips for enhancing ledger management include the following:

- Keep all of the essential information in one location. While many firms choose to employ multiple ERPs, invoicing, and payment platforms, these may create more problems than they solve in the long term. It's inconvenient for AR teams to reconcile data between systems, and reporting soon becomes a nightmare. It is preferable to choose tools that enable the entire AR process to take place under one roof.

- Conduct routine audits of master data to discover consumers who have aberrant credit limits, payment conditions, or discount rates.

- Increase the scrutiny of a company's expenses. Grouping similar expenses together enable entrepreneurs to see how they benefit their organization. If an entire category is not adding value to the enterprise, they want to know as quickly as possible.

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