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What are the best strategies for managing accounts receivable during a downturn?

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Managing accounts receivable (AR) is a crucial part of any business, especially during a downturn. AR refers to the money that customers owe you for the goods or services you have provided. When cash flow is tight, you need to collect your AR as quickly and efficiently as possible, while maintaining good customer relationships. Here are some of the best strategies for managing AR during a downturn.

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CA Ravi Thanki

Community Top Voice | Strengthening Trust through Assurance | A Decade of experience in practicing audit & assurance…

1 Review your credit policy

One of the first steps you should take is to review your credit policy and make sure it is aligned with the current market conditions and your business goals. Your credit policy should define who is eligible for credit, how much credit you can extend, what are the payment terms and discounts, and how you will handle late payments and collections. You may need to adjust your credit criteria, shorten your payment terms, offer incentives for early payments, or charge interest or fees for late payments. You should also communicate your credit policy clearly and consistently to your customers and staff.

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CA Ravi Thanki

Community Top Voice | Strengthening Trust through Assurance | A Decade of experience in practicing audit & assurance, financial reporting in UAE.
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Overall risk assessment of the customer can help to identify the credit limits and ability to pay for the services provided..

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2 Monitor your AR aging report

Another key strategy is to monitor your AR aging report regularly and identify any overdue or risky accounts. Your AR aging report shows how long your invoices have been outstanding and how much money you are owed by each customer. You should use this report to prioritize your collection efforts, follow up with customers who have missed their due dates, and escalate any issues to the appropriate level. You should also track your AR performance metrics, such as days sales outstanding (DSO), collection effectiveness index (CEI), and bad debt ratio, to measure how well you are managing your AR.

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3 Automate your invoicing and collection process

A third strategy is to automate your invoicing and collection process as much as possible, using software or tools that can help you generate, send, and track invoices, send reminders and alerts, and process payments. Automating your invoicing and collection process can save you time and money, reduce errors and disputes, improve your cash flow, and enhance your customer experience. You should also make it easy for your customers to pay you, by offering multiple payment options, such as credit cards, online transfers, or mobile wallets.

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4 Negotiate with your customers

A fourth strategy is to negotiate with your customers who are facing financial difficulties or have a large outstanding balance. You should try to understand their situation and offer them flexible solutions, such as payment plans, partial payments, or discounts for settling their debt. You should also maintain a positive and professional tone, and document any agreements or changes in writing. Negotiating with your customers can help you recover some of your AR, retain your customer loyalty, and prevent legal actions or write-offs.

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5 Outsource your AR management

A fifth strategy is to outsource your AR management to a third-party service provider, such as a factoring company, a collection agency, or an accounting firm. Outsourcing your AR management can free up your time and resources, improve your cash flow, reduce your risk of bad debt, and increase your efficiency and accuracy. However, you should also consider the costs and benefits of outsourcing, such as the fees, the quality of service, the impact on your customer relationships, and the legal and ethical implications.

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CA Ravi Thanki

Community Top Voice | Strengthening Trust through Assurance | A Decade of experience in practicing audit & assurance, financial reporting in UAE.
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Invoice discounting can be used to realize the outstanding invoice and receive cash on the spot. This will reduce the effect of bad debts and its impact on the books of account.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Maja Fagerberg-Ask

Accountant @Normative.io | Let's reach net-zero emissions ??
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During a downturn, effective management of accounts receivable becomes crucial for maintaining cash flow. Some strategies also include -Cash Flow Forecasting: Develop robust cash flow forecasting to anticipate potential challenges and plan accordingly. By combining strategies, businesses can optimize their accounts receivable management during economic downturns, ensuring stability and resilience.

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What are the best strategies for managing accounts receivable during a downturn?

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1 Review your credit policy

2 Monitor your AR aging report

3 Automate your invoicing and collection process

4 Negotiate with your customers

5 Outsource your AR management

6 Here’s what else to consider

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