Wednesday, February 12, 2014

A Simple Fix for an Inefficient Accounts Receivable System

Proper accounts receivable techniques can make a huge difference in the overall financial success of a business or organization.  Leaving outstanding credit to linger longer than necessary can limit cashflow and have accounts thinking they can take their time when it comes to paying off their debt.

Sometimes it’s not the account’s fault though that they aren’t paying on a timely basis; sometimes it’s the creditor’s fault.  As someone who came into an inefficiently utilized accounts receivable system when I took over my finance job in the hotel business, I know just how bad a poorly handled system can hurt collection efforts.

Inefficient use of an AR system
I walked in to an accounts receivable situation in which there was about $500,000 in outstanding receivables.  More than half this outstanding credit was over 60 days.  Suffice to say, I had a lot of work to do.  Worse yet, I found that the AR system wasn’t being properly utilized and was very inefficient…or at least was being used inefficiently.

The simplest of things – assigning invoice numbers – was missing from the system structure, and was creating confusion on all fronts.

Confusion can hamper both sides
Without invoice numbers, we were up a creek without a paddle.  I’d get payments with no reference as to which portion of a bill the payments were to be applied to, and customers would get bills with no invoice number with which to reference their payment or to note what they’d already paid.  Needless to say, it was a mess for both sides.

Something needed to be done and be done quickly.  Payments were being misapplied.  Customers weren’t paying due to confusion or thinking they had already paid.  And the outstanding items on the “Over 90 days” section of our AR sheet was growing rapidly.

Developing a simpler working system
A successful accounts receivable system doesn’t necessarily have to be complex to be efficient and effective.  To maximize efficiency, staying on top of collections can be most helpful.  My system involved a multi-step process:

·         Sending bills (complete with invoice numbers) to customers within 3 business days of when these bills were finalized.
·         Creating a file with invoices, statements, and contact forms (a record of phone calls and emails with dates, times, and company contacts) for each customer.
·         Making a follow-up call within one week after sending an invoice to ensure it was received by the customer, which also helped with relationship building with regular customers.
·         Following up regularly after that first week if payment was not received to find out when payments were planned or if there were any payment issues or billing questions.
·         Maintaining all records after payment was received for future billing reference.

In a little over a year, I’d gotten our AR total down to about $30,000, the lowest it’d ever been, and our “Over 90 days” total was virtually non-existent.  And in the process, I’d made my job easier and made our billing systems easier to understand and more consistent for our customers.


The author is not a licensed financial professional.  This article is for informational purposes only and does not constitute advice of any kind.  Any action taken by the reader due to the information provided in this article is solely at the reader’s discretion.

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