7 Accounts Receivable Best Practices

While often overlooked in favour of accounts payable, accounts receivable is virtually the lifeblood of a company’s cash flow and growth. Implementing solid accounts receivable best practices for managing receivables as the business scales to new markets and verticals can help avoid challenges and complexities such as currency fluctuations, various payment methods, and late payments.

According to the Atradius Payment Practices Barometer report, businesses in Western Europe lose an average of 1.9% of their total revenue due to late or non-payments which could have been avoided with more efficient AR practices.

This guide’s 7 pillars form strategic best practices for finance managers, CFOs, and accountants to manage accounts receivable, optimise processes, enhance cash flow, and minimise associated risks - particularly for businesses operating cross-border.

Accounts receivable management hinges on a robust credit policy that strikes the right balance between opportunities and risk mitigation. Each company should consider credit management as part of their AR process in order to spot trends in overdue payments, proactively address the issues, and chase missing invoices to ensure cash flow is not affected.

Research from industry leaders such as Dun & Bradstreet suggests that implementing structured credit management policies can reduce overdue payments and bad debt exposure by a ballpark of 25-30%, which can have a staggering impact on cash flow. For businesses operating cross-border, those numbers can be even higher. This is because of the various regulatory requirements in each country and currency risks. With that, adopting a localised credit risk assessment in each region, with a global standard, may be beneficial.

Credit policy is something that should be considered when new clients are onboarded. Here are some key components to consider when developing and implementing it:

Standardised application process and credit assessment criteria: Regardless of location or currency used, all customers should go through the same KYC and credit checks, including financial health and payment history.

Document limits and payment terms: Outline and set credit limits and payment terms globally and for each client. Regularly evaluate those and adjust based on the client’s risk profile and any market-specific considerations, such as currency fluctuations or changes to regulations.

Set regular credit policy review: Periodically review both the policy as a whole and the terms for each client. Review their overall financial health, stability and creditworthiness.

The global market of accounts receivable automation is set to grow by around 13% annually through 2032 according to the latest findings, which speaks volumes about the rising importance of better tools to streamline AR processes. Companies that fail to leverage automation and technology for better efficiency in their receivables operations risk falling behind the competition and stunting their own growth.

While there are considerable worries about whether automated AR tools will replace humans, it needs to be highlighted that just like any financial tools, automated receivables are developed to speed up billing and collections processes and streamline the process so that finance managers and accountants can devote their time to more value-added tasks. And the benefits of automation in receivables management go well beyond automating manual work and reducing errors.

Automated AR platforms can seamlessly integrate with your accounting tools to generate and send invoices and custom payment requests to your customers upon the delivery of a product or service. This helps customers pay on time, reduces delays, and ultimately improves cash flow. As customers view the invoices and pay, the automated receivables platforms give you insight into the status of the payment and better control of the revenue and AR performance.

Should the payment be overdue, these solutions are equipped with chaser functionalities, sending periodic follow-ups to your customers which improves the payment cycle timelines and reduces the risk of missing revenue. Companies that invest in receivables automation see a reduction of operational costs of even 40%, despite the initial cost of implementation, alongside improvements in cash flow.

There are a few key considerations to keep in mind when choosing an effective accounts receivable process automation solution. Firstly, it should smoothly integrate with your existing accounting systems, preferably through an out-of-the-box integration rather than custom integration. Secondly, if you're a cross-border business, it should support collections in multiple currencies and various payment methods as it will increase the chances of your customers paying on time.

Cash flow and revenue depend on the effective collection of payments from customers. Without a structured process, overdue and missing invoices can accumulate to severely harm your bottom line. In the UK alone, businesses collectively owed £17.5 billion due to late payments in 2020, according to research by Pay.UK.

Cross-border businesses may encounter additional challenges relating to time zones, languages, and business cultures. It's important to adopt a respectful and culturally aware approach when engaging with international customers to avoid misunderstandings and delays and train your team on best practices, negotiation, and customer communication skills.

An effective collection strategy should consist of the following basics - follow-up schedules and escalation procedures. Firstly, define clear timelines for follow-up communications after the due date has passed. It may mean also setting automated reminders before and after the payment due date to encourage timely payments. Secondly, draft, implement, and train your team on the escalation procedure for overdue accounts. Overdue accounts should be treated using a tiered approach.

While strong collection policies are essential for a good and effective accounts receivable management process, it's just part of the story. Establishing and maintaining good communication with customers is essential for ensuring timely payments. When operating cross-borders, time zones and languages may be a barrier, in which case you should consider working with account managers who can support local languages.

Key customer communication strategies:

Set clear payment terms on each invoice.

Keep customers informed about their account status, especially if a payment is overdue.

Proactively address payment disputes promptly to avoid straining the relationship.

Allow customers to communicate through their preferred channels, whether by email, phone, or a self-service portal.

Tailor communication to the customs and business practices of your international clients.

Another way to reduce delays in payment collection is streamlining the payment process and allowing multiple payment options - it improves customer satisfaction but also accelerates cash flow. Industry research from MONEI highlights that offering various payment methods - such as wire transfer, paying by bank, digital wallet, or card payment can significantly reduce friction during the payment process, leading to more timely payments, higher customer satisfaction, and longer customer lifetime value.

Something to consider is allowing customers to track all their invoices and payments, especially if they are trading with you frequently. Providing them with a customer or payee dashboard where they can see and pay all their bills can significantly increase the chances of timely payments.

For companies with international business operations, it is paramount to offer payments in the customer's local currency to avoid additional fees and confusion. Alternatively, offering automatic currency conversion can simplify payments for international clients.

Your own finance team will be concerned with the last step of the payment process - the reconciliation. This is where, once again, automation tools can be indispensable in the receivables process as they can automatically match payments to outstanding invoices, and mark them as paid in your accounting tool, eliminating manual work and risk of errors.

Data is crucial when it comes to optimising accounts receivable and cash flow as it can uncover invaluable insights into the blindspots in your processes and highlight areas for improvement. In the international context, tracking regional and currency-specific data may help in understanding how different markets impact overall revenue and overall business performance.

Essential AR metrics to track:

Days Sales Outstanding (DSO): The average number of days to collect payment after a sale. The lower the DSO, the faster the payments. DSO is calculated using the formula: (Accounts Receivable / Net Credit Sales) * Number of Days, which helps in assessing accounts receivable performance.

Average Days Delinquent (ADD): Indicates how long overdue payments remain outstanding.

Collections Effectiveness Index (CEI): A percentage index that shows how well overdue payments are recovered.

AR Turnover Ratio: Measures how quickly your business collects payments and converts receivables into cash.

Bad Debt to Sales Ratio: Ratio that compares the amount of uncollectible receivables to total sales. It is indicative of the level of credit risk.

Fyorin's automated accounts receivable tool with RequestPay functionality helps your business establish standardised and optimised receivables processes around invoicing, collection, and payments from the start. We seamlessly integrate with your accounting tool of choice using a two-way sync to automate receivables from start to finish and give your business greater efficiency, control over revenue, improved cash flow, and improved customer relationships thanks to:

Payment collections in 100+ currencies

Automatic follow-ups for late payments

Instant reconciliation, recurring payment requests

Payee dashboard where your clients can track and pay all their invoices

Interested in learning more? Book a free demo or send us an email at [email protected]