Accounts receivable is the balance pending or due to the company for goods or services delivered but not yet paid for by customers. Accounts receivables are listed on the balance sheet as a current asset, & is any amount of money owed by customers for purchases made on credit.
Maintaining a good strategy in place to optimize your accounts receivables is imperative for any business to keep running. Failing to optimize your accounts receivables process can put you in further debt and increase your liabilities. So, how do you ensure you have an efficient accounts receivables strategy in place?
You simply answer these 5 questions
1.Do you have a Customer Credit Approval process?
Most companies may have a good reminder & collections team but may blatantly ignore the very first step in securing themselves; Credit approval process. You need to have your sales team & the accounts team aligned here and understand that the risk profile keeps changing.
Establish the following measures for a good Credit Approval framework
- a) Set sales & accounts responsibilities
Before you set up, your credit evaluation policy in place, study the market. With the changing market, the risk profile keeps changing as well. Involve your sales team to establish when to put an account on hold and when to grant access.
- b) Establish when you will access credit limit
Always decide the credit assessment degree & depth of evaluation on the buying volume of the customer.
If a customer buys low volume goods then only an internal scorecard is enough. If the customer is buying high volume goods regularly then you need to be more stringent.
- c) Limit credit approval periods
Keep a deadline to approve or reject credit applications. Long holds on applications can result in some good profiles slipping by. Also, keep in mind the volatile market conditions that can affect risk assessment of the profiles.
- d) Keep the sales & finance teams aligned
Losing out on sales & credits can put a strain on both, the sales and the accounts team. Keep these two teams in sync so that the process smoothens, as well as the loss & profit stays balanced.
- Do you give incentives for early repayments?
Incentivizing your customers is the best way to trigger early repayments. By giving credits & other benefits you will help them to clear dues early as well as help your company generate working capital.
One common way of incentivizing is to remember this — 2/10, Net 30.
What does that mean? You tell the customer to pay within 10 days and give a 2% discount in the entire sum or pay the complete sum within 30 days.
- Do you have a Periodic Repayment Policy?
It’s best to avoid a compromising situation where your customers aren’t able to pay back and you can’t do much about it. One way of ensuring the burden is less on you and your customers are to have a Periodic Repayment Policy in place.
Decide on a repayment plan and let the burden be distributed and made easy. Give freedom to your customer to make an early payment whenever possible. Incentivize that.
- Have you incorporated Automation?
You can have the best workflow in place but none can guarantee zero human error. Automating your data collecting & credit processing, as well as credit reminding process can streamline the entire ecosystem within your company. Automatic reminders, collecting data promises non-discrepant reports.
- Do you have an integrated collections process in place?
A lack of reporting can make it difficult to find out which customers are most likely to default & which ones are high in priority. Your account’s team needs to add every receipt is added to the customer’s account; this is where automation helps.
Remember the below points for collection
- a) Keep your collections staff updated with new skills & better customer handling
- b) Negotiate payment plans which makes payment easy for both, if not easier for you
- c) Automate processes to avoid manual entries & human errors.
Keep the sales team and the accounts team in sync, and incorporate automation to streamline the entire process.
Always keep in mind, the entire motive of establishing a good account receivables strategy in place is to balance out your present capital with the future one. Never compromise the present resources for the ones you will gain.
Use this 5 question filter to understand, evaluate, and implement a good Accounts Receivables Strategy.
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