What Is Accounts Receivables Management?

Account Receivables Management


      Key Takeaways

      • Definition: Account Receivables Management is a crucial process that includes evaluating a client’s creditworthiness, outlining credit sale terms, and developing a receivables collection strategy.
      • Importance: Proper management of account receivables is vital for maintaining liquidity and healthy working capital, which influences a company’s daily operations and potential for growth.
      • Components: Good receivables management involves assessing creditworthiness, maintaining customer relationships, and promptly detecting credit risks and late payments.
      • Evaluation: Financial ratios like Aging Receivable Analysis and Receivables Turn Over Ratio can gauge the effectiveness of receivables management.

      Account Receivables Management is a set of procedures aimed at managing credit sales. It includes evaluating a client’s creditworthiness, outlining the terms of a credit sale, and developing an appropriate receivables collection process. Simply put, it’s about ensuring customers pay their invoices.

      Account receivables are shown on a company’s balance sheet and, in most cases, listed as a short-term asset. As they influence sales generation, they should be well managed, translating into cash flow with time. As such, when a company doesn’t convert its receivable into cash, it can suffer a lousy liquidity position, affecting working capital and potentially interfering with daily operations.

      What is Account Receivables Management?

      Before granting credit to customers, a company must ensure that a client has a strong likelihood to repay the credit extension. Once a company decides to issue a customer credit, practical credit terms are set, and any receivable that arises must be efficiently monitored.

      The final collection of the amount of credit extended is a crucial area in managing accounts receivables. Companies should have a rigorous system to ensure clients pay on time; otherwise, the receivables levels and the cost of financing will significantly rise to a potentially detrimental level along with an increased risk of bad debts.

      Why is Account Receivables Management Important?

      Merchants make profits by buying slow and selling high. However, if the management of account receivables is poor, they can lose everything during the last sale phase – payment.

      Account Receivables Management directly influences a company’s profit by reducing bad debt. In turn, this increases cash flow along and high available liquidity for future investments.

      Similarly, managing receivables requires more than just reminding customers to pay their balances. It also includes identifying why your customers are not paying. Good accounts receivable management include:

      • Correctly determining a customer’s creditworthiness.
      • Maintaining good relations with clientele.
      • Monitoring and scanning customers frequently for credit risk.
      • Detecting late payments in a timely fashion

      How to Evaluate Account Receivables Management

      Some financial ratios can help in evaluating a company’s receivables procedures and practices. These include:

      • Aging Receivable Analysis records the total receivable amount for each client and their duration. When properly used, it helps assess receivables’ credit risk and collectability. It also helps identify financially problematic clients.
      • Receivables Turn Over Ratio measures the receivables in the door for a given period. A high ratio indicates good accounts receivable management, meaning that a company’s collection policies and credit are sound.

      Apart from these ratios, you’ll also need systems to help you set up and design the receivables management. These include:

      • An acceptance system to determine whether a client receives credit terms.
      • An invoicing system to accurately relay outstanding debt totals to customers
      • A bookkeeping system to monitor the cash flow and receivables risk.
      • A robust CRM to outlines details concerning agreements, contracts, and contacts of customers.

      What is Good Receivables Management?

      To summarize, proper receivable management involves two steps:

      1. Determining the strategy of how your business will extend credit and under what conditions.
      2. Preparing effective procedures such as an invoicing process, collection strategies, and when to involve a debt collection agency to assist in collecting outstanding and overdue unpaid receivables.

      In conclusion, offering sales on credit can be a great way to attract new customers and generate sales that may be otherwise lost. Good account receivables management results in profitability, healthy cash flow, and stable operating cycles. Hopefully, this article has helped you form a plan to manage your outstanding receivables properly. If your business is looking for a compliant and secure omnichannel payment solution to make repayment easy for your clients, please reach out to our knowledgeable Payment Savvy team. Since 2010, we have worked with merchants across the country to understand their customer habits and create the perfect payment system for their business.

      Jason Rabago

      Jason Rabago

      With close to two decades of experience in sales and operations, Jason never hesitates to go above and beyond to meet our client’s expectations. He is our payment solution guru and attentively listens to a prospect’s current concerns to create a custom product offering guaranteed to check every want and need off the list. Reducing risk and increasing revenue is the name of Jason’s game and he loves providing solutions that substantially affect a company’s bottom line. Looking for an insight as to how your company can operate in a more streamlined manner? Reach out to Jason either at one his regularly attended conferences or give him a ring to discuss how Payment Savvy can elevate your business’ potential.