Why Efficient A/R Processes Are So Important During An Economic Downturn

Published on June 27, 2023
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There’s never a good time to waste money in business, but doing so during a recession is downright dangerous. And while cutting fringe benefits like bagels in the break room and office birthday parties might help to boost your bottom line somewhat, there are a number of strategies your company can employ to have a bigger financial impact.

In particular, when your business needs to run lean and mean, one of the most cost-effective strategies you can pursue is to tighten up your accounts receivable (A/R) processes. 

Of course, this doesn’t mean yelling at your A/R staff, telling them to work harder, or placing unrealistic expectations on their performance. Rather, improving collaboration with your accounts receivable team can help you identify ways to improve your processes.

The role of accounts receivables during a recession 

To modify a well-worn phrase: cash flow is king. Whether your company can obtain supplies, pay your workers, pursue growth opportunities, or just plain survive depends on how much cash your business has available. And your A/R and collection processes play a critical role in determining that total.

In a bustling economy, there’s always a lot more “wiggle room” when it comes to A/R timelines since a late or missed payment won’t be that detrimental. During a recession — defined as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months” — a single financial misstep can damage the entire business.

As everyone in the economy tightens their belts, you are much less likely to see rapid or near-instant payments from those customers to whom you’ve extended credit. In an effort to bolster their own cash positions, this business may be more likely to hold onto the owed funds until it’s absolutely necessary to release them. 

Further, as margins shrink, process delays, errors, or bottlenecks that artificially extend payment cycles can wreak all manner of havoc for your organization’s bottom line.

So what do you do? Adjusting your A/R efforts and finding potential areas for improvement regarding their accuracy, precision, and efficiency can move the needle forward and improve your cash flow. And one of the best ways to figure out where those areas are is to perform an accounts receivable analysis.   

Evaluating the needs of your A/R department

There are a number of mechanisms you can use to perform an effective accounts receivable analysis. But they all boil down to asking a lot of questions and taking a long, hard look at your performance data.

First, you’ll want to investigate what’s currently going on with your accounts receivable processes. Talk to your staff about what’s working and what isn’t. Are there any unnecessary steps? Is there a particular procedure that is error-prone or time-consuming?

Accurate reporting is also critical, so use aging reports, trend analysis, and performance records to identify reoccurring delays and map out the payment patterns of your repeat customers. Of course, having the right details in these reports is as critical as having up-to-date numbers.

A/R metrics that measure efficiency 

1. Accounts receivable turnover

The accounts receivable turnover ratio communicates how often a business collects its average accounts receivable balance in a given timeframe — with a higher score denoting greater efficiency. And armed with this insight, you can determine how successful your overall A/R efforts have been at collecting on the credit you’ve extended to customers.

2. Bad debt-to-sales ratio

Extending credit is always a risk. However, you can determine how well that risk is paying out for your business by tracking the ratio of your bad debt — owed funds that will never be paid — against your net sales. The higher the rate, the more caution and credit restrictions you’ll likely want to place on future purchases.

3. Collections efficiency index (CEI)

CEI tracks performance within your collection efforts. Essentially, the figure identifies the proportion of your total outstanding debt that you’ve been able to capture in a given timeframe. On average, a CEI of 80 or above indicates a healthy collections process, while a rating below 50 could mean serious problems.

4. Day sales outstanding (DSO)

DSO captures the average time required to collect payment on a given account. So the lower the figure, the more quickly your business is being paid. By monitoring this metric, you can more easily determine if you are extending too much or too little credit to individual customers.

5. Number of revised invoices

This total records how many of your outgoing invoices needed to be adjusted before being accepted by the client. Routinely, these changes focus on correcting errors or accommodating updated payment terms, but each revision adds further delay to the payment cycle. And if revised invoices reflect a high percentage of your outgoing statements, you likely have an accuracy problem within one (or more) of your A/R processes.

To gain a richer understanding of which A/R metrics you should be tracking, check out our more in-depth article: Top KPIs for Accounts Receivable Management

Automation brings cost-effective, comprehensive efficiency to your A/R

While the metrics listed above are useful in identifying issues, they don’t necessarily outline how to improve your financial operations. And simply telling your A/R team to make these numbers look better without empowering them to do so will quickly result in frustration and burnout in your financing department. Instead, you should look for ways to modify and streamline your accounting operations with a keen focus on doing more with the resources you have. 

Accounts receivable automation software is one of the most powerful tools available to improve your A/R processes. 

1. Streamline collections

If you’re not getting paid, you’re not making money, so effective collections processes are critical for a healthy cash position. So when you automate your chasing tasks (e.g., follow-up emails, phone calls, and texts), you can avoid unnecessary communication delays and ensure that your customers are being contacted consistently and at the right time.

For additional resources, check our articles on writing a past-due invoice e-mail and how to prevent customer cancellations

2. Free up employees for more important tasks

One of the most common advantages of automation is the offloading of mind-numbing, repetitive tasks from your workforce to your software. Without all of this busy work, your employees can instead focus on more strategic efforts like building customer relationships — tasks that are much more rewarding than sending yet another reminder email. 

And when your staff is more engaged in the work they’re doing, they tend to be much more productive as well.

3. Reduce the likelihood of fraud

Ideally, you’ll want to keep your money in your own coffers rather than lining the pockets of criminals and other ne’er-do-wells. And the more personnel that you give access to your billing and financial systems, the more risk. Conversely, with automation, you require less personnel and fewer touches to support your billing efforts, limiting the opportunity for underpayments, unauthorized discounts, and even outright customer data theft.

4. Eradicate manual errors 

Despite our best intentions, humans make mistakes. And by limiting manual data entry, you limit the potential for calculation or transcription errors to show up in your billing. When invoices are automatically generated from stored data or when customers can submit electronic payments directly, you’ll spend much less time on dispute management while shrinking your payment cycle.

5. Risk management and reporting

Knowing who to trust is always a challenge, so to make intelligent business decisions that reduce credit risk, you’ll want clear insight into your current and potential customers. With automated A/R software, you’ll receive a steady stream of data and perform analyses that illuminate customer habits and payment choices that can be easily understood and acted on. 

Armed with these records, you can begin making data-driven decisions on payment terms and to whom you should extend credit, enabling you to add less bad debt to your balance sheet.

Accounts Receivable Automation at Invoiced

At Invoiced, we believe that one of the smartest decisions you can make for your business—whether opportunities to profit grow more scarce or abundant—is to embrace automation throughout your financial processes. With the right technology and the right strategy, you can do more with your current resources, equipping your company to navigate tough economic times better.

If you’d like to explore what automation can do for your A/R processes, check out our industry-leading Accounts Receivable Automation software. Our smart chasing technology helps to shrink DSO while customizable payment portals and autopay functions remove barriers to prompt reimbursement. Further, the platform boasts verification tools and reporting capabilities that help to ensure that your A/R processes run smoothly and accurately. Schedule a demo or create a free account today!

Published on June 27, 2023
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