Running a business can be overwhelming. There are many financial aspects to consider. One of these financial aspects is accounts receivable (also called an AR collection).
Accounts receivable collections can be a great way for businesses to make money and build a loyal clientele. However, if not managed properly, it can be detrimental to a company’s financial stability.
So, to help you ensure using accounts receivable will be beneficial to your business, we’ll go over what they are and the dangers of mismanaging them. We’ll also give you some advice on avoiding the dangers of accounts receivable, and help you bounce back from any mismanagement.
What Are Accounts Receivable and How Can They Help Businesses?
Accounts receivable are a type of credit that businesses can use with their consumers. Instead of making a customer pay an up-front cost, they will allow them to pay for the goods or services they purchased later.
Usually, businesses manage AR collections with an invoice system. The company will keep track of AR collections on its end but will send the customer an invoice to alert them of how much they owe.
Using accounts receivable is like creating a contract with a customer. The business allows the client to use the good or service provided that they pay the business back within the agreed-upon time frame.
Selling products to customers on credit can be a useful method of building a loyal clientele. Accounts receivable can bring in more customers because they know they have time to pay off the balance, and thus don’t feel pressured to pay immediately.
When you have loyal clients who consistently purchase items on credit and pay back balances promptly, your business can make more sales. Increased sales allow you to make more money overall.
However, this contract does not always work out. Although many customers will be loyal and diligent about paying back their balances, there will likely be some who default. A few people defaulting isn’t usually a big deal, but too many can jeopardize a business.
Luckily, though, managing your accounts receivable well can decrease the chances that your business will be in trouble due to too many defaulters. In the following sections, we’ll go over the dangers of mismanaging accounts receivable and how to prevent and stop mismanagement.
What Are the Dangers of Inadequate Accounts Receivable Management?
Because businesses often rely on accounts receivable as a major part of their revenue, the most prominent danger of accounts receivable mismanagement is that your business could be losing money.
There are many ways that the mismanagement of accounts receivable could cause a business to lose money. These include not billing clients for the proper amount of their purchases, completely forgetting to send invoices to clients, or frustrating customers enough to lose them.
The most common cause of AR mismanagement is disorganization. If you don’t have things filed and recorded correctly, it is difficult to know when to bill clients, who paid their bills, how long they took to pay their bills, etc.
When you’re not keeping track of purchases, payments, and dates, it is easy to send the wrong invoice amount to a customer. Even if this client is loyal and always pays back their balance, billing them for the wrong amount could cause you to lose money.
Failing to keep track of purchases and payments can also cause you to send bills late. A loyal client will still pay their balance if it takes you a while to send it. However, delaying the time it takes for money to get to your business can make it hard to function, even if you will get the money eventually.
Completely forgetting to send invoices and reminders is pretty self-explanatory. If you don’t bill a client directly, they may not know they have to pay you, and you will not get paid for that order. Missing out on too many payments can be detrimental to a business’s finances.
Lastly, by not having a consistent billing schedule or having an easy way for clients to pay you, you may cause customers to become frustrated. When ordering from a business, you don’t want to spend time figuring out how much you owe or have a difficult time paying your supplier.
Clients want your system to be easy and organized for their benefit. They also have a lot on their plate. If they feel that making purchases on credit from your business is unreliable or frustrates them, they will take their business elsewhere.
Losing money from a few invoices may not seem that scary, but losing customers due to disorganization can tank a business. Without consumers, you have no business. So, your AR management must be convenient for them.
In the next section, we’ll go over how to avoid and fix inadequate accounts receivable management.
How To Avoid the Dangers of Accounts Receivable Mismanagement
The best way to avoid the dangers of accounts receivable mismanagement is to correctly manage accounts receivable in the first place. Or, if you do notice that mismanagement occurs, take steps to remedy it immediately instead of letting the problem fester.
Of course, all of this is easier said than done. To assist you in this process, we’ll give you solutions for proper accounts receivable management before any problems occur. We’ll also give you the remedies for when you have noticed mismanagement.
Avoiding Accounts Receivable Mismanagement Before Problems Occur
The best way to avoid problems with accounts receivable management is to always keep track of invoices and payments. When a client makes an order, you should document the exact amount and quickly send an invoice for that amount.
When the client begins to pay off their bill, keep track of each payment they make and when they make it. Also, note the date of when the client paid off their whole bill.
It’s also important to send reminders to your customers every so often to ensure they remember to pay their bills. This is especially important if they are coming close to the deadline on their invoice, or if their balances are overdue.
Sending invoices and reminders ensures that your customers will not forget to pay their bills. It also helps them remember to pay bills on time.
So, if you implement these strategies from the beginning, you are less likely to experience frequent defaults from customers. You are also more likely to get paid for your goods and services faster.
However, these strategies may seem daunting, as keeping track of all this information on your own can be overwhelming. Sending out invoices to every client and noting payment dates and amounts is a lot of work. Luckily, there is software, like Upflow, that can help with this issue.
AR software may cost your business some money to use but automated management can help increase revenues, especially if you’re having trouble managing AR manually.
The software automatically sends invoices and payment reminders to all customers. It also often comes with its payment portal, making it easy for clients to pay their bills right when they get their invoices.
Additionally, the software allows you to see your AR data over time. So, it will tell you how long it takes for clients to pay their bills on average, the percentage of people that default, etc.
So, you can know how your business is doing financially.
Fixing Accounts Receivable Mismanagement
The process fix accounts receivable mismanagement is similar to the process of managing it properly in the first place. From the point you realize you are inadequately managing your AR, you should work to send invoices on time and keep track of all payment dates and amounts.
Accounts receivable management software can also be helpful in this situation, as it may make proper management easier and feel less daunting. Additionally, the data visualization aspect will help you see your business’s progress over time, and ensure that your efforts are helping your business improve.
But, to ensure you can fix your AR management properly, you may need to backtrack a little. You may need to track all missing payments and invoices to see exactly how much money you’re missing so you can assess your financial situation.
Having AR management problems does not always mean the end of your business. If you begin to keep careful track of invoices, reminders, and payments, and go back into your records to see how much money you’ve lost in the past, you can help your financial situation.
Because receivable collections often make up a big part of a business’s cash flow, proper management of the AR collection is crucial to survival.
Business owners must take steps toward proper accounts receivable management from the beginning. However, if it has been inadequate in the past, it is not the end of the world.
Keeping track of invoices, payments, and deadlines is vital to AR management. Although this can be overwhelming, there is software that can manage it for you.