With the health crisis entering its second year, some of its long-term effects on the economy remain uncertain. One thing is for sure: companies must be fiscally responsible in order to weather the storm. Cash management is at the heart of corporate strategies and the management of accounts receivable is crucial. As with every period of uncertainty, this is the time to adjust and strengthen practices to emerge from this crisis even stronger. The management of your accounts receivable is no exception – it’s more than ever time to implement lasting practices that will ensure the long-term success of your company.
How has Covid-19 redefined the rules related to accounts receivable processes?
Purchasing Habits Have Changed
The purchasing habits of individuals and professionals have changed: Vividata, a consumer research company found that 73% of Canadians shopped online during the month of January.
This number is significant, for it has an impact on the management of sales of products and services, logistics, inventory management, parcel shipping, invoicing and payments. Some companies have seen their supply chain and logistics costs increase and their profitability diminish; In turn, this impacts their cash flow and their ability to pay. Your company is perhaps in this situation, so the management of your accounts receivable is key. It becomes crucial to internally evaluate what these additional costs are along with their impact on your ability to pay. If you’re not in this situation, your clients might be, and if so it might affect their ability to pay your company on time.
Accounts receivable Service Models Need To Be More Efficient Than Ever
When the economy is running strong and cash flow isn’t a problem, we have a tendency to be more tolerant with accounts receivable: We may be more lenient with payment terms without any effect on our cash position.
However, in times of crisis, the state of your clients’ and suppliers’ accounts could be called into question: Their financial condition has perhaps suddenly been undermined. This uncertainty is a source of weakness, for if one or several clients are unable to pay the amounts owed, it could jeopardize your company’s financial health and in turn create a default situation.
In some countries, governments have provided support measures payment facilities to help companies, thus preventing economic collapse caused by a domino effect of payment defaults.
These solutions are primarily designed to help companies in the short- and medium- term. However, they can have a negative effect when the time comes to reimburse loans and when the help stops. Corporate managers must find methods that will have a long-term positive effect.
Ensuring One’s Finances Beyond Covid-19
Companies that have closely monitored their cash flow have, on average, weathered the storm better than companies who were less fiscally responsible.
The pandemic provided an opportunity for some to review their processes and to implement strong financial practices that were perhaps deemed less necessary when things were going well.
We’ve talked about this in a previous article: accounts payable management is a key element of cash flow management and the digitization of accounts payable supports the continuity of operations in the context of online work. (link to article)
It is also essential to take a look at your accounts receivable: What kind of amounts are you expecting ? What are your payment and collection deadlines and how do you deal with deductions and billing disputes?
Recurring Problems Related To The Management Of Accounts Receivable
Manual Processing of Accounts Receivable
Billing, payments, delays, entry errors… Daily concerns for your accounting teams?
Up until this crisis, the management of accounts receivable could be done without being optimal. However, such management has now become crucial.
If you haven’t yet opted for the automation of your accounts receivable, you’re still processing your payment stubs by hand: Printing, entering data, analysing deductions, getting approvals and managing collections . These methods are very time consuming and generate more possibilities for mistakes between the data entry and the validation of deductions line by line. All of this negatively impacts your collection schedule..
The automation of accounts receivable is a solution that enables you to have greater control over the management of these accounts; it’s a best practice that will help improve your company’s operational efficiency beyond the crisis which we are experiencing right now.
Payment Delays: An Inadequately Addressed Problem
Your Marketing Director will tell you that “a good client relationship is one where the client is satisfied and remains loyal.” We have a tendency to overlook situations like payment delays and to not pressure our clients in order to maintain a good relationship with them.
These delays are tremendously time consuming for the teams that manage them, for you have to send reminders, ensure that payment is complete, recover cheques, deposit them…
In times of crisis, this also adds pressure to the accounts receivable teams: The many calls and email reminders to clients that are sometimes in a difficult situation are not pleasant to manage and affect your employees’ morale.
Automating part of these reminders is also a way to unburden your teams from tasks that can weigh heavily in the long run. It will also enable them to focus on more value-added tasks such as the analysis of accounts receivable.
Best Practices to Optimize your Accounts Receivable Management Process
Do an audit of your accounts receivable
Analyze the aging of your accounts receivable and their number per client. You’ll then be able to gauge your clients’ payment habits: What are their recurring habits? What strategies should be adopted? All this information will help you build your cash flow and cash management plan.
You should be checking the following indicators on a regular basis:
- Payment time
- Collection time
- Inventory turnover
- Amounts owed
- Client Concentration,
Obtaining this information quickly is very difficult when a big part of your accounts receivable processing is done by hand. By automating this process, you can easily maintain a dashboard which will then enable you to develop strategies to improve these indicators.
Quality of Client and Billing Data
“The client didn’t pay the right amount.” “The client just phoned, the invoice amount is wrong, we have to redo it.” “The invoice wasn’t sent to the client’s new address.”
How many times a year do your accounts receivable teams deal with this kind of problem?
It’s important to pay careful attention to the quality of information contained in your database or billing software. In order to make sure that your information is reliable, you can integrate your invoicing software into an accounts receivable automation platform.
You can assign one resource to regularly check the information entered into your system so as to eliminate avoidable payment delays by sending the correct information to the right place on the first try. Such optimization is easy to do and will greatly improve the efficiency of your accounts receivable process. This task can be covered by an accounts receivable automation solution which, thanks to artificial intelligence and machine learning, will allow you to have the exact information at all times.
You can also increase the frequency at which you send your invoices: If you bill at the end of each month, you could review this process to bill each week in order to ensure a more constant income. In that case, an accounts receivable automation system could facilitate payment tracking and reduce the time your teams spend billing.
Reward Clients Who Are In Good Standing
When you receive an invoice payable in 30 days, you have a tendency to think that you’re late on the 31st day… and indeed, reminders by your accounts receivable team are sent after the 30 days.
Fact: It is easier to reward the client in good standing than to run after and penalize the clients who are consistently late.
One common practice is to offer a 2% discount to clients who pay within 10 days or less. This practice is also appreciated by your more serious clients for the management of their payments and can make a difference: If they have to delay payment to one or several suppliers, the discount could put your company amongst those who will be paid on time.
By automating your accounts receivable, it’s easy to implement this type of payment policy without adding extra work for your teams. It will also allow you to reward those who agree to pay your company by automatic transfer or automatic debit on their credit card.
Your main takeaway is this: The tight and rigorous management of your accounts receivable will allow you to avoid cash flow issues. Now is the perfect time to implement strategies and best practices that will improve your company’s financial health in the long term.
If you’d like a strategy tailored to your needs with respect to accounts receivable, you can contact one of our experts who can not only help you identify problem areas but can also collaborate with your teams to apply a streamlined process that will help you reach your goals.