Keeping your Accounts Receivable in Check

When performing ERP evaluations one of the areas our team looks at is Accounts Receivable. Accounts Receivable (AR) is the lifeblood of any business, and as such, having accurate invoices sent in a timely manner and receiving funds for them is vitally important. Today we are going to focus on the timeliness of receiving funds from your customer.

Accounts_ReceivableAs a service and goods provider, your customers have their needs met before your business is given any funds. As a result, you are providing the client with a credit of sorts with the expectation that the payment will be made within the agreed upon time frame. A common issue we see when evaluating Accounts Receivable is an unhealthy balance of unpaid invoices. This threshold varies and will look different for each business. It may be that you have a specific dollar amount that you do not want to exceed in past due monies owed to you. It may be the number of invoices that are 60, 90 or more days past due.

When your AR has an unhealthy number of past due invoices or past due monies this can put your entire business in jeopardy. This cash flow is what allows you to meet your payroll, pay down debt, grow your business, and any number of other goals you have in mind. The ramifications an out of control AR can have on a business are countless and can be dire. So how do can you avoid this from becoming a problem?

When should you act in regard to AR? If your AR is not within a ‘Healthy’ range, you need to act immediately. Collecting funds for invoices as old as 90 days can become difficult, 6 months to a year and your chances of receiving the funds for your goods and services greatly diminish. According to D&B, 26% of invoices over 3 months old are uncollectible, 70% uncollectible greater than 6 months, and 90% uncollectible greater than 12 months.

When is your AR considered not healthy? Removing your typical late payers like government and AAA rated companies that often pay 60+ days late, but always pay, here is a calculation we recommend:

Take your annual invoiced amount and divide that by 365 days, that will be your Average Daily Receivables (ADR). Then take your current AR and divide that by ADR, and that will give you your average days in accounts receivables. If that number exceeds 1.5 times your customer credit allowance terms (due in 10 days) then that is a trigger of your AR getting away from you.

Example: 12-month invoices = $1,000,000 divide that by 365 days and that equals $2739 which is your ADR. If your current AR is $80,000 then divide that by the $2739 ADR for the days in accounts receivable. In this example, that would be 29.2 days. If your credit terms are 10 days, then anything above 15 days in accounts receivable (1.5 times) is an indication that you need to focus on collections.

Additionally, you should be able to collect on 97% of your invoices. If you are experiencing more than 3% of current AR past 90 days, that is another indicator that your AR is getting away from you and you need to strengthen your AR practices and policies.

Collections should be a consistent part of your business. At minimum, a monthly report should be pulled to ensure that your company is within its “healthy” zone and procedures for collections should be put in place to ensure that funds are collected on a regular basis to maintain your business parameters. These procedures should include:

  • When a customer should be contacted for payment
  • The method of contact
  • What you are providing the customer with at this time
  • At what point to escalate the non-payment of outstanding invoices and to whom does the issue escalate?

Also, following up with customers via email regarding payment, including the past due invoices and a statement of payments for them to review is beneficial and helps answer questions before they are asked of your team. Often this is enough to get a response or a payment from customers who may have just missed the invoice the first time around. If no response or payment is received a phone call to the customer’s AR person is the next step. When doing this verify that you are sending the invoices to the correct email address/physical address and ask when a payment can be expected. Follow up the phone call with an email recapping what was discussed in order to avoid confusion down the line. If only a Voicemail was left when calling, then put this in the email as well. Collections can be done in a manner that is respectful and can help build your relationship with the customer if done properly.

If you find your business in a position of needing to stop the bleeding from your AR but not knowing where to start, Nexera will help you. We can assist in creating your ‘Healthy AR’ parameters, as this should be tailored to your business and will vary from company to company. We can create collections procedures, training on these procedures, pulling an AR report monthly, sending past due invoices to customers and calling on past due invoices. We will help you bring your AR back to a healthy range and provide you the tools to maintain it going forward. If you do not have the manpower to get your AR in balance, we can do your collections for your business to get you caught up.

If you are unsure about the health of your Accounts Receivables, we can provide you a complete review of your e-Automate system to validate the condition of your company receivables, To see a sample audit please click on the button below.

Access Sample Evaluation

Written by Amanda Backes – Accounting and Transactional Specialist – Nexera

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