How to solve the most common Accounts Receivable Problems?

Dimitri Raziev04 Jun 202113 mins
Accounts Receivable

“Accounts receivable” is a crucial element of corporate financial management. When we talk about accounts receivable, we’re referring to the money that customers owe a company for the goods or services it has provided. Effective management of these accounts is essential to ensure any business’s financial stability and profitability. Yet the journey of accounts receivable management is fraught with pitfalls, and many mistakes can significantly impact a company’s cash flow. In this article, we’ll take a closer look at the accounts receivable challenge and discuss the most common mistakes to avoid. 

Most businesses have accounts receivable management workflows which cover collections dates, methods, and amounts. Still, analysis reveals that not all companies perform AR management effectively. According to official statistics, £23.4 billion is suffered in late payments by businesses in the UK. As a result, having too many outstanding invoices can damage your business cash flow. This can limit your business from investing in growth opportunities, new equipment and talent acquisition.

Thus, poor accounts receivable control can cause such unintended outcomes as:

– Not following up on overdue invoices

– Marking overdue invoices as bad debt

– Mistakes on invoices

– Assigning payments incorrectly

In this article, you will learn how your company can solve the most common Accounts Receivable challenges.

I- The importance of sound accounts receivable management 

Accounts receivable are an essential part of business accounting. It records and manages receivables from customers. It is responsible for systematically recording incoming payments, monitoring open receivables and carrying out reminder procedures. In other words, Accounts Receivable maintains efficient cash flow and ensures a healthy financial situation for the company.

By recording incoming payments in real-time, Accounts Receivable can maintain an overview of outstanding customer receivables and take early action to avoid late payments. To (ideally) avoid cash flow problems, accounts receivable management also checks and monitors customer creditworthiness. This includes analysing credit applications, checking references and verifying creditworthiness. Based on this information, Accounts Receivable decides on the granting of credit and the setting of payment terms. In addition, the accounts receivable process plays a central role in customer communication. It creates invoices, sends payment reminders and reminder letters, and responds to inquiries about open items. Effective customer communication is essential to minimise late payments and build lasting relationships.

Effective accounts receivable management is crucial to maintaining a healthy cash flow. A high accounts receivable balance can indicate that customers are not paying their invoices in a timely fashion, which can lead to cash flow problems for the company. Conversely, effective accounts receivable management can help improve financial forecasts and strengthen the company’s overall financial health.

II- How does the Accounts Receivable management process work?

Accounts Receivable are essentially your customers’ unpaid invoices. When a company supplies a good or service to a customer and issues an invoice for that service, that amount becomes “accounts receivable” until the customer pays. Even though accounts receivable don’t refer to money that actually is in your pocket, they are part of your assets on your company’s balance sheet. The accounts receivable management process. 

The accounts receivable management process may vary from company to company, but it generally follows the following steps:

Invoice issuance: Everything starts with issuing an invoice once the good or service has been delivered. The invoice must clearly state the following information: amount, payment date and payment terms.

Follow-up: Once an invoice has been issued, regular follow-up is essential. This ensures that the customer has received and intends to pay the invoice. It can also help to identify potential problems that could delay payment quickly.

Follow-up: If payment is not received by the due date, following up with the customer is essential. This is usually a gradual process, starting with a friendly reminder and escalating to more severe measures if payment is not made.

Reconciliation: Once payment has been received, it is essential to reconcile the customer account. This involves checking that the amount received corresponds to the original invoice and ensuring that the payment is correctly recorded in the company’s accounts.

Analysis: Finally, it’s crucial to analyse accounts receivable data regularly. This can help identify trends, such as customers who consistently pay late, and take proactive steps to improve the process.

III- The challenges of accounts receivable management

Managing accounts receivable can present several challenges. For example, customers may pay late or not at all, disrupting the company’s cash flow. Billing errors, invoice disputes and delays in payment processing can also complicate accounts receivable management. Everyday accounting anomalies that make the balance sheet wrong

Accounting is a meticulous exercise, both in terms of filing your documents and receipts and in terms of the rigour and vigilance required in data entry. Throughout the year, pay close attention to the following points to limit errors in your balance sheet.

Making entries in reverse

It’s a mistake that happens to everyone, even experienced accountants. You enter a supplier credit note as an invoice or vice versa. If you don’t notice the anomaly, you risk paying this credit note to your supplier… even though the supplier owes you the money! Remember to check the list of payments before validating them. It’s as simple as that. Look at the invoice for each payment. It is much easier to identify discrepancies in amount or meaning.

Entering incorrect amounts

When you enter a payment, you may inadvertently generate an incorrect entry. For example, for a receipt of 100.50 euros, you enter 1,000.50 euros. The classic excess zero error! As in the previous case, if it’s a supplier invoice, beware of your cash flow if you send a payment ten times greater than the receipt! Forgetting to enter invoices or receipts

The omission of invoice or receipt entries is often due to a lack of administrative order. File all receipts, tickets and invoices as soon as you receive them. In this way, you avoid misplacing them. Keeping your accounts, despite any sound ergonomic online system, requires organisation. 

 If accounting entries are missing and the supplier doesn’t show up right away, you run the risk of understating your liabilities.

As a result, the profit shown under shareholders’ equity may be overstated.

Duplicate entries

This is another classic mistake! It’s easy to imagine that entering the same invoice or receipt twice will distort the reading of profit and loss, capital, debts and receivables, and even cash flow. Fortunately, today’s IT solutions usually prevent you from unpleasant surprises of this kind. Recording two items with the same reference (such as the invoice number according to the supplier) is impossible. Similarly, if bank entries integrate themselves into the accounting system, this prevents data entry errors.

Leaving bank reconciliation unfinalised

Today’s accounting tools offer the possibility of reconciling the bank balance in accounting with the bank balance. Any discrepancies must be identified and justified, such as cheques issued but not cashed by your suppliers. An unexplained discrepancy, however slight, can reveal large sums not accounted for on the debit side and other large amounts on the credit side. Bank reconciliations are performed to the nearest cent at least once a month.

The smaller challenges mentioned earlier can compound into larger issues for companies, ultimately affecting their overall performance:

Poor cash flow management

Firstly, organising your invoices is the key to knowing what your expected cash flow is. This way, poor AR management can lead to a cash-flow shortage. Therefore, building a transparent system is crucial to deal with your AR efficiently.

How to Improve your cash flow management:

– Centralise your information. Having all information about your receivables in one place solves many problems caused by disorganization. In addition, it will allow every person working on receivables in your company to work on the same set of data. For instance, Kolleno offers an AR software solution that keeps all your receivables information in one place.

Above-average Days Sales Outstanding (DSO)

DSO is the amount of time it takes your company to convert credit sales to cash. Hence, high DSO means that it takes too long for your client to meet the agreed payment term.

How to reduce your company’s DSO:

– Organise your collection strategy and make sure that you are sending invoices on time. Thus, you will show your professionalism, which will improve your customer relationships! In addition, think about sending digital invoices rather than physical ones by mail.

– Offer discounts to incentivise customers to pay early. You can also think about setting penalties for late payments.

– Offer flexible payment methods. Adding more payment methods increases the likelihood that your customer will pay on time, this also increases customer retention rate.

Poor Customer Communication

Setting up a healthy information flow is crucial to having a long-lasting beneficial cooperation. For successful AR Management, it is required to properly organise your points of contacts and channels of communication.

How to improve customer communication:

– Regularly update contact list to avoid e.g., sending invoices to the wrong people or address. Kolleno software keeps your customer contact details updated and makes sure to contact the right people. Hence, this practice allows us to achieve an average of 90% successful recovery rate!

– Take advantage of Kolleno communication automation tools. It allows you to keep the communication process smooth and helps you to send personalised content to each of your customers

Lack of appropriate policies

Not having a well-structured credit policy can lead your business to sign customers that are not the best fit for your business.

How to improve your credit policy

– Review your credit approval process on regular basis. Assess the risks as well as the profiles of the companies you want to do business with.

– Make sure you establish transparent terms of sale, which your customer accepts.

– Perform credit analysis process according to the industry your customer works in. Often, different business requires various methods such as a credit report or credit scoring.

IV- Accounts Receivable Management Best Practices

Now that we’ve explored the accounts receivable management process, it’s time to look at some of the best practices for effectively managing these accounts.

Clear credit policy: A well-defined credit policy is the first step to good account management. It should define who can obtain credit, how much and under what conditions. Fast invoicing: The faster you invoice, the quicker you get paid. So, it’s essential to invoice quickly after product or service delivery.

Payment tracking: It’s essential to keep a close eye on payments and promptly follow up late customers.

Dispute management: Customers may dispute an invoice. It is, therefore, crucial to have an efficient process for resolving these disputes.

V- AI to overcome the AR challenges

Checking creditworthiness, verifying payment entries and writing reminders: the workload for companies to ensure their own liquidity via accounts receivable is high – and, therefore, costs a lot of money. The benefits of AR automation are numerous. There are many ar collection software to use in the market. Artificial intelligence (AI becomes increasingly helpful for companies to make accounts receivable management more efficient. There’s a reason for this. Global institute site McKinsey found back in 2017 that companies using AI in accounting can save up to 40% of the costs associated with this activity. A 2020 report by Capgemini came to the following conclusion: companies that introduce AI-based automation in accounting reduce their costs by 25 to 45 per cent. The benefits of ar automation are better time management, increased productivity and enhanced workflow and cash flow. 

1- Example of accounts receivable collections process 

What do accounts receivable management tasks look like in practice? Let’s start with the following case study: Your company produces and sells Air conditioning systems. A customer wishing to set up air con in their company’s premises ultimately orders various complex air con units from you. Your accounts receivable department first examines the customer’s financial situation and payment habits. If no anomalies are found, your company then concludes a delivery contract with the customer. This contract outlines the delivery method, pending invoicing, and payment dates.

Partial invoices are sent monthly, with a payment term of 30 days. Your accounts receivable management department enters and sends the partial invoices. It also monitors incoming payments. However, the new customer is unreliable. He doesn’t respect payment deadlines. Your accounts receivable department sends out payment reminders and informs the sales department of the situation. The sales department talks to the customer, but the situation does not improve. However, the new customer is unreliable. They don’t respect payment deadlines. Your accounts receivable department sends payment reminders and informs the sales department of the situation. The sales department talks to the customer, but the situation doesn’t initially improve. So, your accounts receivable department issues a reminder, threatening to suspend deliveries. The customer reacts and accelerates his overdue payments. Your accounting department documents the payment difficulties in its analysis and records this information for possible future transactions with the customer. Accounts receivable automation solutions can drastically change your management, from reactive to predictive. 

2- Various accounts receivable processes companies can use AI 

Receiving and processing invoices

Companies can use AI to recognise invoicesThe aim is to extract and process data automatically. For example, AI can extract relevant information, such as invoice number, invoice date and amount, and transfer it to the accounting system.

Checking payment terms

Companies can use AI to check invoice payment terms automatically. For example, software can determine whether specified payment terms have been met or whether there are any inconsistencies.

Dunning system

AI can be used to automate AI applications that can automatically generate and send reminders to customers based on defined rules and overdue payments. As result, it improves your collection process, securing faster ar payments. Accounts receivable automation solutions can help you gain an incredible amount of time. 

Customer communication

AI-based chatbots can automatically respond to customer queries about invoices and payments. Chatbots can answer your most frequent questions, update payment status or direct the customer concerned to the right contact.

Credit risk assessment

Best ar automation software can leverage AI to help assess the credit risk of individual customers. AI can establish risk profiles and recommend credit limits or payment terms by analysing customer history, payment habits, and other relevant data. Benefits of AI in accounts receivable: If companies use AI software in accounts receivable, they benefit above all from these advantages:

Automation of routine tasks

Artificial intelligence automates mundane, repetitive tasks such as checking incoming payments, creating invoices or allocating payments to open items. This way, companies have less work and make fewer mistakes.

Earlier detection of payment defaults

Companies can use artificial intelligence algorithms to identify patterns and trends in payment behaviour and history. As a result, payment defaults can be detected earlier. This enables early action to be taken to minimise the risk of non-payment.

More accurate credit assessment

AI can help better assess potential customers’ creditworthiness when analysing customer information. Using machine learning algorithms, companies can make more accurate predictions of customer creditworthiness, thereby reducing the risk of non-payment.

Efficient receivables management

Artificial intelligence software enables companies to define appropriate collection measures. It analyses data such as customer history, payment behaviour and creditworthiness and suggests possible customised collection methods. Thanks to ar metrics dashboard, you have a better insight into your financial management. Better cash flow forecasts tools also enable companies to improve their cash flow forecasts. By analysing past transactions and identifying patterns, AI can help accurately forecast future cash receipts. This allows companies to plan better and manage their finances.

Take away 

Accounts receivable management is not only useful to handle your financial management. It’s also about reinforcing your customer relationships. Good accounts receivable management means treating customers with respect, even when they are in arrears. It’s also important to communicate clearly and regularly with customers to avoid misunderstandings and disputes. There are many solutions on the market, from the accounts receivable management services from consultants to accounts receivable management companies that provide software tools.

Accounts receivable management is not only an essential part of handling your company’s financial management. It requires constant attention, effective monitoring systems and clear communication with customers. Although it may seem complex, effective accounts receivable management can significantly improve a company’s financial health. 

Perhaps the best way to avoid the most common errors associated with accounts receivable management might be an a r software. The best ar automation software can unlock your company’s potential. 

Explore below how Kolleno helped DNA Payments to solve the receivables challenges in the video below!