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Accounts Receivable Management

How to prepare a good Accounts Receivable policy

Accounts receivable management incorporates is all about ensuring that customers pay their invoices. Good receivables management helps prevent overdue payment or non-payment. It is therefore a quick and effective way to strengthen the company’s financial or liquidity position. This Wiki explains the importance of receivables management, the benefits and how to prepare a good receivables process.

The importance of receivables management

Every company wants to buy low and sell high. But they can lose everything with poor receivables management during the last phase of the sales process (payment). Over half of all bankruptcies can be attributed to poor receivables management, which demonstrates its importance. Receivables management involves much more than reminding customers to pay. It is also about identifying the reason for non-payment. Perhaps a product or service was not delivered? Or there was an administrative error in the invoice? Good receivables management is a comprehensive process consisting of:

  • Determining the customer’s credit rating in advance
  • Frequently scanning and monitoring customers for credit risks
  • Maintaining customer relations
  • Detecting late payments in due time
  • Detecting complaints in due time
  • Reducing the total balance outstanding (DSO)
  • Preventing any bad debt in receivables outstanding

What is the benefit?

Good receivables management directly contributes to a company’s profit because it reduces bad debt. The company also has a better cash flow and higher available liquidity for use in investments or acquisitions. Furthermore, good receivables management boosts a company’s professional image.

Preparing good receivables management

In principle, good receivables management involves two steps. Firstly, you determine your strategy and then you specify the appropriate procedures.

Step 1. Determine the strategy

  • Which customers do you accept and under which conditions?
  • Which customers do you monitor?
  • Who should no longer be accepted, and when is the exit?

Step 2. Prepare appropriate procedures

  • What is your invoicing process like?
  • What is your invoice like?
  • When do you remind a customer by phone?
  • When do you remind a customer in writing?
  • What does the reminder look like?
  • When do you engage a debt collection agency?
  • When will you start legal proceedings?
  • What is the role of your employees in this respect? Will you choose outsourcing or in-house management?

Which systems will you require?

Companies use different applications and systems to limit the risks and update the data. These can help you set up and design your receivables management.

  • Acceptance system. Based on credit information, you determine whether a new customer is accepted or not. This may be a manual or automated process.
  • Monitoring system. This system checks the entire portfolio for continuous insight into existing customers and suppliers. This is essential, particularly with regard to chain parties.
  • Invoicing system. Invoices may be sent manually or automated (sometimes as a digital invoice) and reminders must be logically aligned.
  • Bookkeeping system. All receivables and payables are booked in this system, which provides insight into the cash flow and receivables risk.
  • CRM system. The Customer Relationship Management (CRM) system lists information relating to agreements, contact and contracts with customers. Complaints can also be processed in this system to improve insight into the background of non-payment. 

Automating receivables management

Automating receivables management allows you to link all the above systems. This improves workflow efficiency and provides better insight by generating cash flow and customer reports. Automatically linking credit information reduces the percentage of non-paying new customers. By automatically integrating the debt collections in the process, the percentage of non-paying existing customers also falls.

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