What is Accounts Receivable (A/R)?
Accounts Receivable (A/R) represents the
money owed to a company by its customer goods or services sold on credit.
Why is it important?
Accounts Receivable (A/R) directly
impacts cash flow and is a good indicator of how efficiently your company is
collecting payments.
What is considered best practice for Accounts Receivable (A/R)?
While
best practices for A/R can vary by industry, business model, and company size
in general it is always preferred to keep your Accounts Receivable as low as
possible as this indicates faster collection from customers and improves cash
flow. It’s important to benchmark against industry standards as there are
several factors that can go into just what a healthy A/R balance looks like,
such as industry norms, company specific credit terms, customer relationships,
etc.
What can I do to improve my Accounts Receivable (A/R) balance if it's growing too high?
Improving Accounts Receivable (A/R) is
all about enhancing the efficiency with which you collect payments from your
customers and understanding how the credit terms you provide them effects your
overall cash flow.
If you find your A/R balance growing higher than you want it to, here are some
strategies to help manage and potentially reduce A/R:
• Establish Clear Credit Policies: Clearly
define who is eligible, how much they can receive and what the payment terms
are. Most late payments are a result of customers not fully understanding
credit policies.
• Prompt Invoicing: Send out invoices
immediately after goods are delivered or services are rendered.
• Train and Motivate Your Collections Team:
Ensure your collection team understands the importance of A/R and is trained to
communicate effectively and diplomatically with customers.
• Diligent Follow-up: Implement a
systematic approach for following up on overdue accounts using reminders via
email, phone calls, texts, etc. The more reminder methods you have the better.
• Regularly Review and Adjust Policies:
Just like other business metrics, your A/R policies need to be regularly
reviewed to ensure they are still working for you. Don’t be afraid to make
changes if needed.