Account Receivable (AR) Management – Impact on Your Business
Dec 10, 2024
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Customer not paying up on time? Bad debts? Poor Operation Cashflow? These are some of the signs of poor Accounts Receivable (AR) management. AR management is one of the most critical yet often overlooked aspects of business operations. It refers to the process of managing outstanding payments and ensuring timely collections from customers. Effective AR management helps businesses maintain cash flow, reduce financial risks, and enhance overall business stability. On the other hand, poor AR management can result in cash flow issues, increased operational costs, and a higher risk of bad debts.
In this article, we will explore the significance of AR management, its impact on your business, and how outsourcing this process to a professional accounting firm like ours can help improve your financial health.
What is AR Management?
AR management involves tracking and managing amounts owed by customers for products or services provided on credit. The goal is to ensure that these receivables are paid promptly, reducing the time between offering a product or service and receiving the corresponding payment. (In technical term, this is known as AR turnover) Effective AR management includes:
Invoicing and Payment Terms: Setting clear payment terms, such as due dates and any discounts for early payments. This may also include in evaluation of the customers’ credit ratings and historical payment records.
Collections: Sending periodical reminders appropriately, following up with customers, and implementing debt recovery procedures if necessary.
Record Keeping: Maintaining accurate records of transactions, payments, and overdue amounts.
Customer Relations: Ensuring good communication with customers, making the process of payment smooth and professional.
Why is AR Management Important for Your Business?
Maintains Healthy Cash Flow
Seen a lot of the 90s Mediacorp Chinese-drama? Whenever there is a business failure, you will notice that it will be attributed to “周转不灵” (aka cashflow problem). The frequency of this appearing in our drama scene is certainly a good representation of what happened in actual business world. (Didn’t expect our local scriptwriters are so well versed in Accounting and Business statistics!) Cash flow is the lifeblood of any business. Without sufficient cash inflow, a company cannot pay its suppliers, employees, or creditors. According to a survey by a US bank, 82% of businesses fail due to poor cash flow management. (You can also refer to this article for more information on the common reasons why an SME fail) Effective AR management ensures that payments are collected on time, which helps maintain a healthy cash flow and ensures business operations run smoothly.
Reduces Bad Debts and Write-offs
Poor AR management often leads to an accumulation of unpaid invoices, resulting in bad debts that need to be written off. A Survey conducted by Atradius found that almost 49% of B2B payments were late with 9% being bad debts in 2022. Bad debts like this will impact bottom line and can be a “lethal” to small businesses who have minimal margins. Effective management practices like regular follow-ups, timely reminders, and proper vetting of customers help minimize the risk of non-payment and reduce the likelihood of bad debt.
Improves Profitability
When payments are delayed, businesses might face higher operating costs due to the extended period of credit extended to customers. Moreover, working capital is tied up in unpaid invoices, making it more difficult to invest in growth opportunities. By ensuring timely collection of AR, businesses can free up capital, reduce reliance on external financing (therefore lower interest expense), and improve their overall profitability.
Strengthens Customer Relationships
A well-managed AR process contributes to stronger relationships with customers. By maintaining clear and open communication regarding payments, businesses can avoid misunderstandings and ensure that customers feel valued and respected. When customers know they are dealing with a company that handles AR efficiently, they are more likely to continue doing business with you.
Supports Long-Term Growth
Effective AR management can also support your business's long-term growth. When payments are collected promptly, businesses have the financial resources they need to invest in expanding operations, entering new markets, or improving products and services. Furthermore, maintaining strong cash flow and reducing financial risk provides a solid foundation for sustainable growth and stability.
Common AR Management Challenges
Despite the clear benefits, many businesses struggle with maintaining effective AR management. Some of the most common challenges include:
Lack of Organization Without a proper AR system in place, invoices can get lost, deadlines may be missed, and payments could be delayed. Small businesses especially may find it challenging to keep track of all receivables.
Inconsistent Follow-ups Failure to follow up with customers on overdue invoices is another common issue. Regular reminders and follow-ups are crucial to ensure that payments are collected in a timely manner.
Customer Payment Disputes Customers may dispute invoices or delay payments due to various reasons, including dissatisfaction with the product or service. Having a clear communication process and addressing issues promptly can help prevent these situations from escalating.
Inaccurate Credit Policies Poorly defined credit policies can lead to bad debt. It’s important to vet clients before offering credit terms to ensure that they have a solid financial background and are likely to pay on time. It is important to screen and analyse your customer records. By keeping credit terms realistic and credit amount palatable, it will ensure that small businesses do not commit to more risks than intended.
Outsource Your AR Management to an Accounting Firm
You may have heard of outsource accounting. But are you aware that AR management are also a common service offered by some accounting firms? Given the importance of AR management and the potential challenges businesses face, outsourcing your AR management to a professional accounting firm like ours can provide significant advantages. Outsourcing enables you to focus on core business activities while leaving the complexities of AR management to experts.
Our team can:
Develop customized AR management processes that align with your business goals.
Provide timely reminders and collections to ensure that outstanding payments are collected efficiently.
Streamline your invoicing system, reducing the risk of errors and delays.
Help you develop and implement credit policies that reduce the risk of bad debt.
Offer expert advice and insights on improving your cash flow.
Summary
Effective AR management is a key factor in maintaining healthy cash flow, reducing bad debts, improving profitability, and supporting long-term growth. By outsourcing AR management to a qualified accounting firm, businesses can ensure their financial health remains strong, allowing them to focus on strategic growth and day-to-day operations.
If you're struggling with managing your accounts receivable or seeking a better way to handle your business’s finances, contact our team at OakTree Accounting and Business Solutions. Our expert accountants can provide tailored AR solutions to ensure your business remains financially secure and poised for success.
https://atradiuscollections.com/documents/payment-practices-barometer-singapore-2022-en.pdf
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DISCLAIMER: The views and opinions expressed in this article are those of the author and do not necessarily represent the views and opinions of any individuals or organizations with which the author may be affiliated, either in a professional or personal capacity, unless explicitly stated.
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