October 12, 2021

What Is Accounts Receivable Management & How to Improve It

6-minute read

What Is Accounts Receivable Management?

Accounts receivable management is an integral function in any business organization. It has a significant impact on your business’s customer relations, cash flow, operating capital, and bottom line.

Accounts receivable (AR) refers to payments owed to your business for services or products already delivered. Proper AR management is the process of ensuring that these payments are made on time, consistently, and reliably. Well-managed AR minimizes past due accounts and the time and effort your staff needs to spend on them.  

AR management encompasses a number of different processes. It will involve the extension of credit, customer relations, invoicing, monitoring and analysis of payment trends, collections, and reconciling of payments received.

Because of its reach, good AR management can impact the business in many ways. The most obvious of these is the minimization of bad debt. No business wants to be burdened by too many outstanding invoices or delinquent payments. Having healthy and reliable payments from customers ensures that you will have sufficient cash flow to fund the ongoing needs of your business. 

A well-managed AR program will also support good customer relations and a healthy reputation for your business. Finally, an efficient process will help your staff stay focused on important, high-value work that supports your bottom line. 

5 Ways to Improve Accounts Receivable Management

Given its importance, it’s highly beneficial to your business to invest in measures that maximize AR effectiveness. Here are the steps you can take to improve the management of your accounts receivables.

Customer Credit Approval

One of the essential elements of effective AR management are the steps you take to extend credit to your customers. Having a detailed and well-conceived process for approving customer credit will ensure that you are extending credit to reliable customers who are more likely to pay on time. This minimizes both the risk that your business is exposed to and the demands that may be placed on your AR teams by having too many accounts that are in arrears.

So, what steps can you take to implement good credit policies?

First, establish a set of policies that clearly outline the terms of credit for your customers. This can include such provisions as the level of credit that may be extended, terms of payment, interest, what constitutes default, and how the policies will be enforced.

Next, create a thorough process for determining credit eligibility. Your guidelines should be designed to provide flexibility and options to widen your customer base, but with an eye to minimizing your exposure to risk. In short, you don’t want to extend credit to customers who aren’t credit-worthy, and the amount of credit you do extend should reflect a reasonable consideration of risk, the value of the product, and the customer’s ability to pay.

To make this determination, review the necessary information, such as financial statements and credit scores. A customer’s net worth and past payment history are important considerations.

Customer Master Data

Another area that can impact your management of accounts receivable is the quality of data that you collect about your customers and the manner in which it is maintained. 

Master data is a term now commonly used to refer to the basic, static information that you maintain about your customers. It contains information about your customers’ profiles, such as business name, address, and bank account, but it does not include transaction data. Master Data Management (MDM) is the process of maintaining this information in a centralized location that is standardized, accessible, and secure.

Data concerning your customers can become problematic in multiple ways. When different departments in your company enter data about the same customer using different platforms or formats, or without standardization, you will have duplicate records that are difficult to interpret and use. This can put a real drag on your accounts receivable when the data is required for processing outstanding payments.

A well-implemented Master Data Management system will help you avoid these kinds of hang-ups by allowing your business to establish a “golden record” of information, which is a single, well-defined repository of all the data in your organization across all departments and platforms.

There are many ways for your business to properly manage master data. Just like in credit approval, you should have some clear policies in place, including clearly defined terms and an understanding of the kind of data you will be gathering. 

Put protocols in place for frequently checking the quality of your data to eliminate bad or conflicting information. Training your staff about data practices will also ensure that everyone understands and is following the same protocols.

Invoicing & Billing

Along with credit approvals and data management, invoicing also supports AR management. Here’s how to execute professional and effective billing.

For starters, you want your invoices to be accurate, so keep good records about the work, products, and/or services that you will be invoicing.

Also, be clear about the terms of payment to avoid any confusion. Include all the terms that were agreed to with the customer in your invoice to refresh their memory and avoid disputes—and be sure to follow those same terms as well. This lets your customers know that you are reliable.

Decide how often you want to invoice your customers and do so at regular intervals.  Send out invoices as soon as possible to avoid delays.

Make sure your invoices are clear, easy to read, and look professional. Include the terms of payment and due dates.   

Attention to these details will provide reliable billing that can help make the process of accounts receivable run more smoothly.

Improve Your Cash Application Process

Finally, cash application is an equally important element of your AR management.

Cash application is a part of the AR process that applies incoming payments to the correct customer accounts and receivable invoices. Having a well-run cash application process will minimize discrepancies and speed up your accounts receivables.

Cash application poses a myriad of challenges in the digital world. Historically, it has been done through a manual process. Payments were usually made by check, which was accompanied by an invoice.

Technology has changed this process so that payments now come in many forms. These include credit cards, electronic debit, ACH, wire transfers, and old-fashioned checks.

This new range of options for customers is a challenge for cash application specialists because data from transactions now has to be retrieved from multiple sources and sometimes does not accompany the actual payment. 

The good news is that businesses can also use technology to improve their cash application process. Automation speeds up the process by matching payment to the invoice and entering the information into your general ledger in a fraction of the time it takes accountants to review the paperwork. 

It can also reduce the incidence of error and increase accuracy in your application process. Automated cash application is scalable, allowing you to accommodate a range of payment options and grow your business.

Why Managing Accounts Receivable Matters

Good AR management impacts cash flow and so many other aspects of the business. Therefore, it should always be given the attention it deserves.

If your organization is not effectively managing its collections, and there is a widespread and persistent problem of payments in arrears, you run the risk of not having enough cash on hand to pay for important operations like salaries, purchases, and dividends. 

Good AR management maintains healthy relations with your customers and bolsters your business’s reputation. Having poor customer relations could affect your company’s client retention and its ability to get good deals in the future.

Finally, the strength of your accounts receivable program could impact your relations with investors and your ability to grow. Cash flow can impact your balance sheet and your bottom line. Investors and lenders will look to see whether your business has an effective accounts receivable process and a good track record for collecting payments, as an indicator of healthy balance sheets.

Automating Accounts Receivable with BlackLine Cash Application

There is a solution to leverage automation to improve your Accounts Receivable. BlackLine Cash Application transforms the order-to-cash cycle by significantly reducing the time it takes to apply cash to open invoices.

The solution uses AI to accurately apply payments to customer invoices in your ERP. Over time, machine learning enables continuous optimization by predicting future matches to further reduce the need for manual effort and reliance on remittances.

Intelligent automation eliminates the manual accounts receivable processes and drives the most efficient end-to-end process from your customer invoice to cash in the bank—fully applied and closed.

BlackLine Cash Application can help your business collect more cash and reduce days sales outstanding (DSO), increase working capital and availability of cash, improve process efficiency and reduce costs, achieve global process standardization, and more.

By applying intelligent automation and the latest in reporting and analytics technology, organizations can remove manual processes and surface critical intelligence so their teams can focus on driving more value for the business.

Discover how to speed up your accounts receivable cash application to automatically match customer payments to invoices and reduce unapplied cash by up to 99%.

Brian Morgan

Intelligent Automation