What is accounts receivable management? And tips to improve it

Keeping your finances on track and staying on top of your accounts receivable (AR) is important for healthy cash flow in a small business. Effective accounts receivable management involves managing and tracking outstanding customer invoices and ensuring timely payment collection.

Let’s look at the significance of accounts receivable management and tips on how to improve your payment collection and reduce the risk of unpaid invoices: 

How accounts receivable management works

Accounts receivable management is how your business manages outstanding invoices and monitors customer payments. It involves setting clear payment terms and managing credit sales.

Accounts receivable management involves various steps to ensure timely payment collection, including: 

1. Set up credit management: The first step in accounts receivable management is setting up your credit management process. Before providing credit to customers, evaluate their creditworthiness and the likelihood of timely payment. 
2. Generate invoices: Here, you’ll generate and send invoices to customers for goods or services. Accurate and detailed invoices will avoid any confusion or disputed invoices later.
3. Collect payments: Once you send invoices, the next step is payment collection. You can collect payments in various ways, but accepting digital payments can help you speed up the process. 
4. Manage past due payments: In case of disputes or late payments, you’ll want to have a process for resolving past due payments. This involves open communication with customers, understanding their concerns, and resolving issues promptly.

Note that regular reconciliation of payments with outstanding invoices can help identify any discrepancies or overdue accounts. Once you receive a payment, record it in your accounting system. 

5 ways to improve receivables management  

Receivables management helps keep your cash flow healthy. By implementing the right strategies, businesses can improve their accounts receivable management process and minimize issues, such as bad debts, late payments, and outstanding invoices.

Here are five tips to enhance your receivables management and optimize payment collection:

1. Have clear billing procedures

Clear billing procedures are an essential component of effective accounts receivable management. Businesses can minimize payment delays with a checklist of billing processes. 

Part of that process includes standardizing your invoicing. This means generating an invoice that is accurate and detailed, that itemizes the products or services provided, the payment amount, and any applicable taxes or fees.

2. Set and stick to your credit policies

Clear credit terms and conditions ensure clients understand your customer financing requirements. This helps set expectations and avoid confusion regarding payment deadlines and methods. 

It’s important to tailor credit policies to your cash flow and business. Larger companies may have more flexibility and can offer longer payment terms to their clients, whereas smaller businesses may need to have shorter payment periods.

3. Be proactive about collecting payments

Being proactive about collecting payments is a key part of accounts receivable management. Start by providing clear communication channels for customers to ask questions about invoices or payments. 

Regularly follow up on past due invoices and overdue payments, which involves tracking payment due dates and contacting clients to remind them of outstanding invoices. Try to set automatic reminders to streamline this process and minimize the chances of human error.

4. Automate where you can

Manual processes can be time-consuming. Implementing automation software or tools allows you to automate repetitive tasks and free up valuable time to focus on more strategic activities.

With an artificial intelligence accounting assistant, like Intuit Assist, you can help automate accounting tasks such as invoicing, payment reminders, and payment collection. 

5. Make the payment process as easy as possible 

Ensure your payment process is easy and user-friendly for customers. You can make things easy by providing multiple payment options, such as credit cards and ACH payments. Flexibility increases the likelihood of receiving timely payments but also enhances customer satisfaction. 

Common challenges of managing receivables 

One of the primary goals of accounts receivable management is to ensure the timely collection of outstanding invoices. This ensures strong cash flow and can strengthen your customer relationships. 

However, collecting payments can come with challenges. For example, you’ll likely encounter: 

• Invoicing delays: These can happen when businesses have a manual process for generating and sending invoices, leading to delays in getting them to customers. A delay in invoicing also means a delay in payments—and potentially negative cash flow.
• Billing errors: Mistakes like incorrect amounts, duplicate invoices, or missed invoices can happen—especially with manual invoicing. 
• Overdue payments: Businesses may struggle to identify overdue payments, delaying follow-ups for payment collection.

Such challenges can negatively impact your business with delays in payment collection. One way to overcome AR management challenges is by regularly monitoring and analyzing key metrics. 

Measuring the effectiveness of your AR management

To successfully manage accounts receivables, you’ll want to focus on three metrics:

Day sales outstanding (DSO) measures the average number of days it takes for a business to collect payment on its accounts receivables. The DSO formula is: 

(Average accounts receivable / net credit sales) * Number of days in period

Lower DSO ratios mean you’re collecting receivables quickly. This can improve cash flow. 

Cash conversion cycle (CCC) measures how quickly a business is able to convert its cash into sales and then collect the proceeds from those sales. The CCC formula is: 

Days inventory outstanding (DIO) + Days sales outstanding (DSO) - Days payable outstanding (DPO)

A shorter CCC is generally better, as it means that the business can generate cash more quickly. 

Accounts receivable turnover ratio is how efficiently you collect your accounts receivable. The accounts receivable turnover formula is: 

Net credit sales / Average accounts receivable

The higher the ratio, the more efficient you are at collecting receivables. And while not a traditional metric, customer satisfaction is important in assessing the effectiveness of AR management. 

Satisfied customers are more likely to pay on time and maintain a positive business relationship. Clear communication and efficient payment processes contribute to higher customer satisfaction levels.

Choose the best payment setup for your business

Effective accounts receivable management is crucial for maintaining a healthy cash flow and minimizing the risk of bad debt. Part of that is getting paid online, which helps businesses run smoother and more efficiently. Accounting software with built-in features for accepting digital payments, like QuickBooks Online, makes it easier to manage accounts receivables.

QuickBooks Payments: QuickBooks Payments account subject to eligibility criteria, credit, and application approval. Subscription to QuickBooks Online required. Money movement services are provided by Intuit Payments Inc., licensed as a Money Transmitter by the New York State Department of Financial Services. For more information about Intuit Payments' money transmission licenses, please visit https://www.intuit.com/legal/licenses/payment-licenses/.