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AR collections process for faster cash inflow

Updated on :  

08 min read.

Accounts receivable or AR is the money owed to a company by consumers for products or services. Investors can better understand a company’s financial stability and liquidity by looking at its AR collection.

What are account receivables?

AR refers to a company’s overdue bills or the money owed by customers. The term account receivables refer to the amount a company is entitled to from customers to provide a service or product.

AR are a type of credit that a firm extends to its customers and typically contain conditions that demand payments to be made within a short period. The period can range from a few days to one financial year.

Several firms enable customers to buy on credit to make the payment process easier. The amount will be noted in accounts receivable collections until the monthly invoice is paid. Allowing purchases on credit also encourages more sales. Customers are more inclined to purchase things if they have the option to pay for them later.

How do account receivables affect cash flow?

You offer your goods or services in return for a commitment from a consumer to pay you at a later date. If your company regularly lends credit to its customers, AR collection is likely to be the most critical source of cash inflows.

In the worst-case situation, unpaid accounts receivables can leave your company struggling to meet its obligations. Late or slow-paying clients are more likely to cause cash shortages, leaving your company without the funds it needs to meet its cash outflow commitments.

Techniques to improve AR collections

Not having effective AR collection mechanisms in place can negatively affect cash inflow. You can enhance AR collections and reinvest the money to develop your business with a little fine-tuning and execution of specific best practices suggested by ClearOne. There are four different methods to go about it:

1. Create a dashboard for account receivables

An AR dashboard allows you to track and quantify the cash inflow into your business easily. Key performance indicators (KPIs) such as AR turnover ratio, sales outstanding, average days overdue, and AR ageing by the customer should all be included in the dashboard. Consider your dashboard to be an early-warning system, allowing you to address any potential problems before they arise.

2. Make your team aware

 Educate your employees on the importance of each indicator once the KPIs have been set. Let them know how their activities affect each KPI and the company’s overall financial health. When your staff understands how their work adds to the firm’s development, success, and profitability, they’ll strive to meet and preferably surpass corporate objectives.

3. Create policies and procedures

Written accounts receivable rules and processes are required in any firm. These regulations, which should be included in broader accounting policies and procedures, detail how the firm bills clients, receive payments and enters transactions into the accounting system.

4. Maintain client account details

To have a successful AR collecting process, you need accurate client data. Incorrect names and addresses on invoices can upset customers and delay payment. Billing data should be checked regularly, and appropriate controls should be in place to prevent unauthorised changes to customer information.

Managing AR collections isn’t the most thrilling aspect of owning a business. However, by applying these four strategies by ClearOne, you can improve your AR team’s productivity and position your company for future success.