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Treasury

Now Is the Time to Evaluate Your Accounts Receivable Processes

Build a long-term accounts receivable strategy by digitizing, streamlining and optimizing your processes.


For many businesses, the pandemic heightened the focus on cash, disrupted supply chains and reduced sales. Despite these changes, companies still had fixed costs to pay, forcing accounts receivable departments to find short-term fixes. Now that businesses are moving out of emergency mode, companies can evaluate their short-term solutions and explore long-term ones to reduce friction costs and increase efficiency.

 

1. Making Accounts Receivable Fully Digital

Challenge: When COVID-19 forced most employees to work remotely, companies—especially those reliant on paper and manual methods—felt the strain. With limited office access, many businesses scrambled to automate their accounts receivable workflows and speed payment collections.

Short-term response: Many organizations had already started to shift customers to electronic payments prior to the pandemic. However, COVID-19 accelerated the need to transition. Staff could now collect and deposit payments weekly or twice monthly, rather than several times a week. But the process was slow and further delayed deposits, which reduced days sales outstanding.

Long-term solution: There are different approaches you can take to address this issue based on your relationship with the client.

  • Existing clients: Continue to transition existing clients to electronic payments. 
  • New clients: During onboarding, you can update their payment options to electronic ones.
  • Reluctant clients: Consider offering incentives to encourage electronic payments. You can also remove manual payment methods from your invoices and leave only electronic payment details, so customers must take an extra step to use manual methods.

 

2. Streamlining Your Collections Processes

Challenge: Remote work made manual processes less efficient. Now that some businesses plan to operate 100% remotely or implement hybrid working arrangements, accounts receivable processes need updating.

Short-term response: Organizations were operating in crisis mode. Who would pick up checks at the office? Could this employee move the organization’s check scanner to their home, or did they have to go to the bank to deposit? Accounts receivable teams needed to quickly answer these and other questions to keep the lights on.

Long-term solution: To find a more permanent solution, companies can analyze their current methods and invest in streamlining them. Their review may include: 

  • Leveraging technology to automate the cash application process
  • Electronically communicating purchase orders and invoices
  • Ensuring the accuracy of your customer master data
  • Offering payment methods that are easy for your customers to use
  • Finding ways to automate customer invoicing, such as email or electronic data interchange
  • Monitoring your accounts receivable with key metrics to maintain liquidity
  • Revising your accounts receivable policies and processes

 

3. Revamping Your Credit Strategy and Collections

Challenge: During the pandemic, many organizations experienced more late payments and delinquencies, so they had to adjust their credit discipline.

Short-term response: Often, businesses were more aggressive in their collection calling efforts and opened alternative payment channels to collect funds.

Long-term solution: Moving forward, organizations may want to revamp their credit strategy and collections processes. Consider renegotiating existing customers’ payment terms, providing customer incentives to pay sooner and offering customers short-term relief in exchange for prompt or partial payments. 

For new clients, you can implement a four-part credit risk assessment that examines:

  1. Internal data, including customer order history, credit terms and master data
  2. Economic indicators, including the customer’s industry or regional impact, credit rating and Dun & Bradstreet data 
  3. External data, including industry specific data—i.e., liquidity indicators, customer segmentations and government support of the industry
  4. Other factors, including logistical disruptions, labor availability and other socio/geo/political risks

Best practice is to conduct periodic customer reviews, it is essential that these reviews incorporate key performance indicators to ensure none of these areas have drastically changed.

 

Optimizing Accounts Receivable

The pandemic required accounts receivable departments to quickly make changes. That was more than a year ago—enough time to evaluate these short-term solutions. You can make adjustments, whether increasing technology and digitization adoption or implementing efficient and scalable processes, to improve days sales outstanding and the cash conversion cycle.

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