Accounts Receivable Management

Accounts Receivable (A/R) is the money owed to a business by its clients. The main objective in Accounts Receivable management is to minimise the Days Sales Outstanding (DSO) and processing costs whilst maintaining good customer relations.

Accounts receivable is often the biggest current asset on the balance sheet. Indeed in many small and medium-sized businesses receivables represents the majority of working capital. The other key objective in A/R management is to use systems and processes that ensure that the financing potential of the company's receivables can be maximised.

Monetizing the Relationship
Before any invoice or bill can be sent out companies need to determine how to charge for the product or service they provide, Americans call this Relationship Monetization. As products and services become more and more complex, this has become much more difficult. Furthermore, there increasing number of regulations and rules requiring companies to be able to fully itemise and justify their invoices/bills. Today invoices need to show how the full charge is built up. And the multiple parties involved in delivering the service, and each require their share of the income generated.

There are now companies and software packages specifically designed to monetize relationships and manage these complex billing arrangements.

Setting Credit and Payment Terms
The first task in accounts receivable management is to set credit and payment terms for each type of customer. There are many bureaux providing credit risk/scoring database services for the business and consumer markets which can be used for assessing each customer and setting the payment terms that will be offered and what discounts, if any, will be offered.

Payment Collection
Traditionally, suppliers accepted any payment method their customers were prepared use. However, there are so many payment systems today, which have very different costs of collection and associated risk of non-payment, that suppliers need to choose which payment systems they will accept (and those they won't).

Efficient collection of payments and processing of receivables is the holy grail of receivables management. The key objective is to maximise Straight Through Reconciliation and processing of receivables. There are always new processing technologies coming through, such as the use of Open Scan in the USA to speed up cheque receipt processing, the automatic three way matching of paper based invoices, imaging, and OCR reading. The introduction of SEPA Direct Debit scheme offers opportunities for significantly improving collections across Europe.

Receivables Collection Analysis and Strategies for Chasing Late Payments
The A/R department typically uses the sales ledger to manage the collection of receivables. A good indicator of how efficiently the receivables are being collected is the Accounts Receivable Collection Period: the average number of days that accounts receivables are outstanding. This should be only a few days longer than the standard days of credit.

The Accounts Collection Period is just an overall average. It is far more important to distinguish between which receivables are 'pre-due' and those that are 'post-due' the payment due date. The post-due invoices need to be classified into those that are subject to a dispute and those that are just overdue. Traditionally, these overdue invoices have been analysed by several other variables, such as geography, industry, the amount due, and the invoice age, to determine what action to take. An important improvement on this approach has been the introduction of holistic risk based collections, which have proven to be a much more effective in minimising bad debts. There are a range of receivables management systems available.

At some stage, the exact date varies depending upon company policy; the unpaid invoices are passed to one or more Collection Agencies which take over responsibility for collecting payment.

Minimising Invoice Disputes
The main reasons for disputes and deductions that delay the settlement of an invoice are the quantity is disputed, the quality of the product or service, non-compliance with the contract, other (taxes, returns, etc.), or the buyer is negotiating a price discount.

Invoice disputes are a major reason why invoices are unpaid. Dispute resolution is a complex and manually intensive task. Companies need to be able to identify short pay invoices and disputes and capture all the information about the dispute as soon as possible. Then the dispute needs to be assigned to a member of staff to resolve the dispute as quickly and efficiently as possible.

There are now systems and services, typically part of the overall accounts receivable system or service, that speed up this process considerably. These automated dispute resolution systems can prevent bad debts, cut administration costs and also reduce the Days Sales Outstanding significantly.

Using Receivables to Generate Finance
A company's receivables is an important source of working capital. Receivables can be used as collateral to generate finance using one of the following: Supply Chain Finance, Dynamic Discounting of invoices, Factoring, Auctioning of Receivables, Invoice Discounting & Securitization.

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