Accounts Receivable (AR) best practices might not be the most glamorous part of your financial strategy, but they are undeniably one of the most crucial. When done right, effective AR strategies can improve cash flow, reduce risk, and provide the financial stability your organization needs to grow. For CFOs and Finance Directors, refining your AR approach isn’t just about keeping the lights on—it’s about fueling strategic decision-making and long-term success.
Considering collections’ most important job is reducing DSO, this is a big problem.
Why best practices in Accounts Receivable matter
Imagine this: your team is spending hours chasing payments, your DSO (Days Sales Outstanding) is creeping higher each quarter, and cash flow forecasts feel more like educated guesses. If this sounds familiar, it’s a sign your AR policies need an overhaul.
The numbers speak for themselves:
- 60% of invoices are paid late, with an average delay of 20 days. (Atradius Payment Practices Barometer)
- Companies that automate their AR processes see a 31% faster payment cycle on average. (PYMNTS.com)
Following the best practices in accounts receivable addresses these pain points by streamlining processes, reducing manual effort, and ensuring that cash comes in predictably and on time.
The result? Your finance team can spend less time firefighting and more time planning for the future.
Building blocks of Accounts Receivable best practices
Here are the key elements every CFO and Finance Director should prioritize when crafting or refining their AR policies:
1. Clear Payment Terms
Unclear or inconsistent payment terms can confuse customers and delay payments. Make your terms simple, specific, and easy to find on invoices and contracts.
- Pro Tip: Use terms like “Net 30” or “Payment due upon receipt” to set clear expectations.
2. Customer Credit Policies
Not every customer is created equal, and extending credit to the wrong ones can jeopardize your cash flow. Develop a formal credit approval process that includes credit checks, setting credit limits, and periodic reviews of customer payment behavior.
3. Automate Where Possible
Manual AR processes are slow, error-prone, and expensive. Automation tools, like Alevate AR, can streamline invoicing, payment reminders, and cash application while improving accuracy.
- Pro Tip: Automation can significantly reduce manual work and lead to cash application rates of up to 99% and reduce AR costs by up to 30% while improving collection rates.
4. Consistent Follow-Up Procedures
Polite but persistent follow-ups are key to minimizing late payments. Set up a standardized process for reminders at intervals (e.g., 7 days before due, on the due date, and 7 days overdue).
5. Offer Multiple Payment Options
The easier you make it for customers to pay, the faster you’ll receive your money. Consider offering a variety of payment options like ACH transfers, credit cards, and online payment portals.
6. Monitor Metrics Religiously
Tracking the right KPIs helps you identify bottlenecks and opportunities for improvement. Key metrics to watch include:
- DSO (Days Sales Outstanding)
- Collection Effectiveness Index (CEI)
- Percentage of overdue invoices
AR best practices checklist
Implementing AR best practices doesn’t have to be overwhelming. Use this checklist to ensure your processes are thorough and efficient:
1. Define Payment Terms
- Are your payment terms simple and easy to understand?
- Are they clearly stated on all invoices and contracts?
2. Assess Customer Creditworthiness
- Do you perform credit checks before extending credit?
- Have you set clear credit limits for each customer?
3. Standardize Invoicing Processes
- Are invoices sent promptly after services or goods are delivered?
- Do invoices include all necessary details (e.g., payment terms, due date, and payment options)?
4. Leverage Automation
- Have you implemented AR automation tools to streamline invoicing and payment tracking?
- Are automated reminders and follow-ups in place?
5. Establish Follow-Up Protocols
- Is there a consistent schedule for payment reminders and overdue notices?
- Do you have escalation procedures for chronic late payers?
6. Track Key Metrics
- Are you monitoring DSO, CEI, and overdue invoices regularly?
- Do you review AR performance metrics monthly?
7. Offer Flexible Payment Options
- Do you provide multiple payment methods to accommodate customer preferences?
- Have you explored incentives for early payments?
8. Train Your Team
- Are team members trained to follow AR policies and use automation tools effectively?
- Do they understand how to handle disputes or payment delays professionally?
Framework for evaluating AR effectiveness
To ensure your AR policies are driving results, periodically evaluate them using this framework:
1. Analyze Cash Flow Trends
- Is your cash flow more predictable since implementing new AR policies?
- Have you reduced reliance on external financing to cover shortfalls?
2. Measure DSO
- Has your DSO decreased over the last three to six months?
- Are your numbers aligned with industry benchmarks?
3. Evaluate Collection Rates
- Are more invoices being paid on time?
- Have you reduced the percentage of overdue invoices?
4. Customer Feedback
- Do customers find your payment terms clear and reasonable?
- Have they expressed satisfaction with your payment options?
5. Internal Efficiency
- Has automation reduced manual effort and errors in your AR processes?
- Are team members spending less time chasing payments?
6. Audit Your Policies
- Are there any gaps in your AR policies or areas where consistency is lacking?
- Have you updated policies to reflect changes in customer behavior or market conditions?
Common AR mistakes to avoid
Even with the best intentions, many companies fall into these common traps:
- Overlooking small overdue balances: These can snowball and hurt your cash flow over time.
- Ignoring early warning signs: Customers who regularly delay payments may need to be re-evaluated for credit terms.
- Relying too heavily on manual processes: In today’s digital age, sticking with spreadsheets puts you at a competitive disadvantage.
The payoff of following Accounts Receivable best practices
When your AR policies are firing on all cylinders, the benefits go far beyond just timely payments. You gain:
- Improved cash flow stability: Predictable cash inflows make it easier to plan for payroll, inventory, and growth initiatives.
- Stronger customer relationships: Clear terms and efficient processes create a seamless experience that builds trust.
- More time for strategy: With less time spent chasing payments, your finance team can focus on high-impact activities like financial planning and analysis.
Final thoughts
So, what are the best practices in accounts receivable? Implementing clear payment terms, leveraging automation, and staying vigilant with your metrics can transform AR from a headache into a strategic asset.
Ready to take your AR policies to the next level?
Start small by reviewing your current processes, identifying bottlenecks, and exploring automation tools that align with your goals. Remember: even small improvements can yield big results when it comes to cash flow management. Learn more at https://www.serrala.com/ar-automation/cash-application today!
