Best Practices for Managing AR

Accounts receivable (AR) is a key asset on a company’s balance sheet. It can represent more than your cash, inventory, and equipment, especially in B2B service businesses. Managing it well comes down to collecting your outstanding AR in the most efficient ways. And in equipment-heavy businesses, managing AR is critical to make sure you have the cash flow to service equipment debt payments.?

At Brady CFO, we recognize that maximizing accounts receivable involves effective collection strategies and a strong accounting team. With the right people and best practices, you can make sure your cash flow remains healthy, risks are minimized, and your company's financial standing is solidified.

The Importance of Managing AR

AR represents uncollected cash, and the longer you don’t collect it, the greater the risk of your client going out of business and never paying you. With effective AR management, you can enjoy:

• Improved cash flow
• Reduced financial risk
• Greater operational efficiency
• Enhanced financial planning

You’ll be protecting your assets while paving the way for sustainable growth and financial stability.?

6 Effective Methods for Managing AR

You need to set up effective processes to streamline payment collection, enhance communication, and foster positive relationships with your clients. Here’s how to do it:?

1. Evaluate Customers’ Creditworthiness

Assessing customer creditworthiness is crucial before sales, but it must be balanced with business growth goals. A practical approach is to offer new customers with bad credit a small initial credit limit, which can be periodically increased if they pay on time. For instance, start with $10,000 and raise the limit every three months with timely payments. This strategy allows you to manage risk while serving clients effectively.?

2. Assign Responsibility for AR Collections

You should have at least one person in charge of collecting AR in your organization. They will do two functions at a minimum:

1. Send automated aging reports to remind customers of outstanding bills. If your invoice terms are net 30, send automated aging reports on day 25. These reports help clients' accounts payable teams identify missing invoices and make sure they're aware of outstanding bills, facilitating timely payments.
2. Send non-automated communications to clients once their invoices are aged past a certain threshold that demands more attention be placed on their account. For net 30 terms, follow up with customers around day 35 to check payment status. Clients often ignore automated reminders but are less likely to disregard a personalized email from an actual person. They will feel more guilt for not responding and addressing your concerns.?

This proactive approach balances automation with the personal touch necessary for effective communication, helping you maintain a healthy cash flow and strengthen customer relationships.

3. Implement an AR Metric

Establish a weekly AR metric for management and the AR collections team to monitor. Regularly evaluating this KPI helps readily spot concerns and systematically address them. It also ensures accountability because the responsible team member knows their performance is consistently evaluated, allowing them to speak with confidence about the status of AR.?

4. Offer Clients Multiple Ways To Pay?

Lack of payment options can be a bottleneck for some clients. Offering various payment method options, including check, ACH, and credit card, will accommodate preferences and expedite payments. Be sure to consider any associated fees against the cost of credit.

Credit card processing fees can be high, so compare them to your credit line costs. If fees are lower than credit line interest, allow credit card payments. This method is convenient for clients and may incentivize timely payments through credit card rewards.

5. Set Payment Term Thresholds

Set thresholds for overdue AR to manage accounts effectively. For instance, with net 30 terms, you might refuse further services if a client has $100,000 past due for 60 days. Inform clients they must pay down their bills to continue receiving services.

6. Negotiate Favorable Net Terms

Choose the shortest net terms possible without risking sales. Unlike competitors with net 30 terms, you can set terms like payment upon invoice or 10-15 days. The net terms are always a negotiation opportunity for you. Take advantage of it. Lower net terms set an expectation for quicker payment turnaround. If you let your customers pay you at 45 days instead of 15 days, that’s 30 days of sales you have sitting in AR that could be used to reinvest in your business.

Improve Your Financial Health With Effective AR Management

Managing your accounts receivable well sets your business up for financial growth. You'll enjoy steadier cash flow and less stress over unpaid bills, boosting stability. Just make sure you have the right team and systems for efficient collections, and you’ll be able to focus on expanding your business with confidence.