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Effective Accounts Receivable Management: 15 Signs You’re on Track 

25-Jun-2024 . 7 min read

Overviewing B2B Accounts Receivable Management

Accounts receivable (AR)—also known as outstanding invoices or trade receivables—is critical to your business’s cash inflow, liquidity, and operating efficiency. The AR management process itself, however, is not that simple and comprises many sub-processes spread over several phases, mostly intertwined.  

Thus, each step contributes to the AR cycle, helping your collections come in faster and more seamlessly. Yet, like every other business function, your AR department can’t be flawless and efficient all the time.  

Sporadic issues? That’s perfectly normal! 

In this article, we’ll spotlight some favourable signals that your accounts receivable operation is on track and contributing positively to your business finances. 

How Effective Is Your Accounts Receivable Management: 15 Positive Signs 

The positive impact of AR management reflects in a healthy cash inflow and overall business efficiency. So, while challenges are inevitable, you gain significant benefits by identifying and capitalizing on the strengths of your AR process. Also take a stock of weaknesses and address them lest they add to your bad debts and disrupt cash flow.  

The following 15 positive signs indicate that you’re managing accounts receivables truly effectively, driving your business toward financial stability.

1. Definitive Credit Policy: Beacon to AR Operations

You have a clear and well-documented credit policy in place.  

The credit policy includes essential details and metrics regarding eligibility criteria, credit terms, standard practices, approval mechanisms, exceptions, review & renewal, and other relevant parameters. This mitigates credit risk and ensures consistency in credit decisions. However, a lack of clarity leads to inconsistent credit decisions, increased risk of bad debts, and customer dissatisfaction. 

2. High Invoice Accuracy Rate: Key to Healthy Collections  

Errorless billing and seamless invoice processing.     

Yes, it is important to put every essential piece of info on the invoice document, and make sure it is dispatched to customers via agreed channels on time. This allows customers to understand what they are being charged for and the payment schedule. Inaccurate or unclear invoices can cause misunderstandings, disputes, and delayed payments, however. 

High invoice accuracy is key to healthy collections, meticulous recordkeeping, and transparent customer relationships—absolutely.  

Service Invoice Template from Microsoft

Simple service invoice template. Source: Microsoft.com

3. Reduced Days Sales Outstanding (DSO) i.e. Getting Paid Faster

Your DSO numbers are within an acceptable range.  

A lower DSO indicates that your customers are paying their invoices promptly, improving cash flow and liquidity. Conversely, a high DSO can indicate inefficiencies in the collections process, leading to cash flow challenges and increased risk of bad debts.  

Generally, businesses aim for a DSO or average collection period of 30 days or less for sales on credit. Notably, a 45-day period is acceptable for most. Furthermore, DSO levels vary across industries. For instance, in industries such as oil & gas, architectural and engineering services, and management consulting, the AR cycle can stretch beyond 60 days.  

Cyclic or seasonal industries may experience fluctuations in DSO throughout the year, however. 

Here is a survey that analyses Q2 2023 DSO, DPO, and DIO performance of 1,000 of the largest public companies in the United States.  

4. Multiple Payment Options—Settling Invoices Faster!  

Providing multiple payment options—credit card, bank transfer, or online payment systems—to your customers for invoice settlement? Convenience matters!  

Offering multiple payment modes makes it easier for customers to settle their invoices faster, improving cash flow, therefore. Limited payment options, on the contrary, can lead to delays in payment processing and increased DSO as a result. 

5. Fixed Billing Cycle and Proactive Tracking of Outstanding Invoices

You have a fixed billing cycle—monthly or bi-monthly?  

Inconsistent invoices are difficult to track and follow up on, whereas a fixed cycle allows for effective tracking and timely reminders. Any lapses would mean missed opportunities to collect payments and an increased risk of aging debt. However, don’t barrage your customers with too frequent reminders! 

6. Timely Sales Ledger Reconciliations: Finding and Fixing AR Inaccuracies

Your accounting team diligently matches and updates accounts.  

Timely reconciliation of AR accounts brings accuracy to financial records and helps spot discrepancies or errors. Delays and oversights can, however, lead to financial misstatements and difficulties in receivables tracking.

Regular account matching and timely closing are handy for audits and legal proof, furthermore. 

7. High Operating Efficiency: Accounts Recceivable Supervisors Nailing it!

Alright, so you have low AR operating costs and optimized resource utilization!  

Systematic and efficient accounts receivable management help streamline resources and workflows, reducing fixed and variable operating costs. This is very important because process inefficiencies—from invoicing to processing to compliance—can escalate costs at every step, thus reducing ROI and overall impact.

8. High Compliance: Elevating Accounts Receivables Process with Best Practices  

Your AR transactions and records meet prevailing regulatory and industry standards.  

Adhering to federal, state, and industry-specific requirements minimizes the risk of fines, penalties, and legal issues. Non-compliance can result in reputational damage, financial losses, and legal liabilities on the other hand. 

9. Positive Cash Flow—AR Administration Heading in Right Direction  

Your cash inflows are in the green! 

The state of cash flow, working capital, and expense account depends heavily on how well your company manages its accounts payables and receivables. Favourable cash inflow indicates that payments are being received in a timely manner, allowing businesses to meet their financial obligations.

It’s a sign that your accounts receivable management is impactful.

On the flip side, negative cash flow can result in financial pressure, missed investment and growth opportunities, and difficulty in meeting expenses. 

Graphic: Signs of Successful AR Management

10. Reduced Aged Receivables: You’re Handling Customer Balances Skillfully  

Well, AR aging percentages vary from industry to industry—10 to 15% is generally acceptable.  

Minimizing aged receivables reduces the risk of non-payment and write-offs. A high volume of aged receivables can strain cash flow and increase the risk of bad debts. Most companies run aging reports monthly, quarterly, or yearly to overview theirAR performance. 

11. Collection Effectiveness Index (CEI): Outstanding Receivables to Cash

Your CEI is on the higher side!  

A high CEI in AR accounting indicates that the collections process is effective in converting outstanding receivables into cash. But a low CEI suggests inefficiencies in collections efforts, leading to delayed payments and cash flow problems. Accurate invoicing, clear communication with buyers, and persistent follow-ups help bolster your collection efforts. 

12. Robust Monitoring & Review:  Elevating AR Operations

Regular monitoring and in-depth review of accounts receivable process and performance allow businesses to identify issues and implement corrective actions promptly. Failure to monitor and review AR operation consistently can result in missed opportunities to improve accounts receivable and collections while mitigating risks.  

Also, it is particularly important to filter customers who consistently delay payments. heir consistent delays pose challenges to your cash flow and liquidity management, and overall profitability.

13. Receivables Performance Benchmarking by Industry 

Comparing your company’s accounts receivable performance against industry standards provides insights into how well the business is managing its receivables compared to its peers. So, falling below industry standards may indicate inefficiencies or areas for improvement. 

Sample Chart: DSO vs Cash Flow in  AR

This says a lot about how your overall AR administration is panning out.

14. Sound Customer Relations: Managing AR and Trade Relations Effectively

Your customers and clients pay you on time!  

Issues, if any, are sorted amicably based on trustworthiness and transparency from both sides. Maintaining positive relationships with customers strengthens trust and loyalty, potentially leading to repeat business and referrals. 

15. Reduced Debt Risk: Robust Accounts Receivable Management & Control

You are maintaining a low bad debt expense. Well done!  

This means you are doing a good job limiting instances of overdue payments, aging receivables, and receivables that are no longer collectible. Businesses can reduce their bad debts risk considerably via effective AR management. Which of course also helps minimize the impact on cash flow.

Absolutely critical as poor management of AR and collections can increase the risk of exposure to bad debts! 

Closing Note on Managing Accounts Receivables

Timely and accurate collections are the ultimate goals of accounts receivable management, whether B2B or B2C. Furthermore, achieving this with minimal operational costs and hiccups is the ‘icing on the cake’. This can be challenging, of course. Here, outsourcing provides an excellent avenue to build your AR process at a significantly lower cost than in-house operation expenses! 

Get in touch with Centelli if you are seeking a competent accounting outsourcing services partner. We provide reliable, end-to-end AR accounting that fit your business needs and budget. 

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