Accounts Receivable Mistakes and Their Implications

In the dynamic landscape of business, every company expends substantial resources to generate increasing levels of revenue. However, that revenue must be converted into cash. Every dollar of a company’s revenue becomes a receivable that must be managed and collected, hence a compelling need for accounts receivable automation software and the cash flow management strategies.

While the availability of cash and working capital management is undisputed, efficient accounts receivable management solution and a well defined cash flow management strategies is the cornerstone of sustainable financial success and revenue growth. The ability to optimize cash flow, minimize risks, and maintain healthy customer relationships hinges on the effectiveness of your accounts receivable processes. 

In B2B, companies generally have a strong belief and conviction at the time of generating an invoice that is going to be collected on time and in full. Unable to collect means loss of revenue or erosion of the bottom line in the form of bad debts. 

This means the staff and processes that manage your receivables asset also –

• End up managing 100% of your company’s revenue and can impact on bottom line
• Ends up being a service touch point for virtually all your customers. 

Irrespective of the size of the company, you will use accounting software and tools as basic as the combination of Xls and emails along with your accounting ERP ( Enterprise Resource Planning ) to track your receivables. As the company scales, one tries to stretch the capabilities of the manual process and the tools, leading to common accounts receivable mistakes causing delays in collections, and potential write-offs.

What are the common accounts receivable mistakes?

Mistake #1: Inadequate Customer Screening and Credit Checks

Inadequate customer screening and credit checks can be detrimental to your business’s financial health. Late or non-payments due to poor customer assessment can result in cash flow disruptions and increased bad debt. Thought leaders emphasize the importance of thorough customer screening to mitigate risks. 

Mistake #2: Inefficient Invoicing Processes

Traditional invoicing methods can lead to delays in payment processing, hindering cash flow optimization. Streamlining invoicing procedures is crucial for faster and more efficient payments. Industry experts advocate for modernizing invoicing practices to enhance revenue cycles.

Mistake #3: Incorrect customer contact to send invoice copies

Sending invoice copies to the wrong customer contact, such as the sales representative, the procurement officer, or the general email address can cause delays or misses in the payment process, as the invoice may not reach the person who is responsible for approving and making the payment, or it may get lost or ignored in the email inbox. This error can increase the costs and efforts of the AR process, as it may require additional follow-ups, resends, or confirmations, or it may create confusion or frustration for both the business and the customer. At times it can damage the relationships and reputation of the business, as it may indicate a lack of professionalism, attention, or care, or it may create a negative impression or experience for the customer. Even if one plans to leverage accounts receivable automation software, it is critical to ensure your customer contacts data is correct and up to date.

Mistake #4: Incomplete mapping of customer payable process

Another common accounts receivable mistake is incomplete mapping of the customer payable process, which is the process of how the customer approves and makes the payment for the invoice. Incomplete mapping of the customer payable process can result in delayed or reduced payments. Your business may not be aware of or comply with the customer’s payment terms and conditions, such as the payment method, the payment cycle, the payment approval, or the payment documentation which will increase costs and efforts to collect.

Mistake #5: Not leveraging credit period to check if the invoice is clear for payments

Credit period is the period of time between the invoice date and the due date, where the customer can pay the invoice without any interest or penalty. This is a most crucial period to rain check if you have fulfilled all the obligation including necessary documentation or user sign-offs for the accounts payable to clear payments on time. Not leveraging the credit period to check if the invoice is clear for payments can result in delayed or missed payments. Your team may not be proactive or timely in reminding or following up with the customer about the invoice and payment, or may not be aware of or resolve any issues or disputes that may prevent or delay the payment.

Mistake #6: Ignoring Timely Follow-ups on Overdue Payments

Delayed follow-ups on overdue payments can significantly impact accounts receivable and, consequently, company finances. AR Professionals stress the importance of crafting effective collection strategies to improve recovery rates.

Mistake #7: Lack of Clear Communication and Dispute Resolution

Transparent communication with customers regarding outstanding balances is paramount to maintaining healthy relationships and resolving payment disputes effectively. Expert advice sheds light on handling disputes and preventing them in the future.

Mistake #8: Delay in involving sales to engage with customers for payments

Another common AR mistake is delay in involving sales to engage with customers for payments, which is the process of involving the sales representatives who have the relationship and rapport with the customers, to help with the payment process, especially for the overdue accounts. Delays in involving sales to engage with customers for payments can result in your business not being able to leverage the relationship and rapport that the sales representatives have with the customers, to persuade and influence them to pay on time and in full, or to negotiate and agree on the payment terms and conditions.

Mistake #9: Failing to Analyze Accounts Receivable Data

Accounts receivable is a great indicator of customer satisfaction and operations efficiency. A happy customer is likely to pay on time. However, disputes can be an excellent indication of operational inefficiency. 

Failing to analyze accounts receivable data is a mistake that can affect the efficiency and profitability of a business. Accounts receivable data can provide valuable insights into the performance, trends, and risks of the invoicing and collection processes. 

Mistake #10: Not leveraging legal means

Sometimes, despite your best efforts, some customers may refuse to pay their invoices or dispute the charges. In such cases, you may need to resort to legal action to recover your money. However, many businesses are reluctant to take this step, fearing that it will damage their reputation, cost too much, or take too long. There is always a way to balance between losing a customer and recovering your dues. Not leveraging legal means can be a costly mistake, as it can lead to bad debt, and lost opportunities

What are the implications of these Accounts Receivable mistakes?

Accounts receivable teams, which are responsible for managing and collecting the outstanding payments, play a crucial role in safeguarding the financial stability and success of any business.

However, AR teams often face various accounts receivable challenges and make accounts receivable mistakes that can negatively affect the company’s cash flow, profitability, and customer relationships. Let us discuss some of the implications of the accounts receivable mistake for your business.

Higher DSO and impact of cash flows

Days sales outstanding (DSO) is a measure of how long it takes for a company to collect payment from its customers. A high DSO indicates that the company is inefficient in collecting its receivables, which can result in cash flow problems and reduced liquidity.

One of the reasons for a high DSO is late payments from customers, which can stem from a variety of factors, such as customers forgetting to pay, having insufficient funds to cover the invoice, or deliberately delaying payment. Another reason is inaccurate invoicing, which can occur due to human error or miscommunication between departments. If an invoice has incorrect information or you apply a payment to the wrong invoice, you could experience a financial loss if you fail to collect on all outstanding invoices as a result of the error.

To reduce DSO and improve cash flow, you need to implement effective AR processes and policies, such as sending invoices promptly, following up on overdue accounts, offering incentives for early payments, and automating AR tasks. You may want to explore accounts receivable automation software for the same.

Time-consuming credit approvals

The credit approval process involves evaluating the creditworthiness of a potential customer and determining the terms and conditions of the credit agreement. Credit approval is an important step in ensuring that you only extend credit to customers who are likely to pay on time and in full.

However, credit approval process can also be a time-consuming and tedious process, especially if you rely on manual methods and outdated systems. This can result in delays in issuing invoices, processing payments, and closing deals. It can also increase the risk of errors, fraud, and bad debt.

To make the credit approval process more efficient and reduce risk, you need to leverage technology and data, such as using credit scoring models, integrating with credit bureaus, and automating credit checks and decisions.

Increase in write-offs

Write-offs are the amount of money that a company cannot collect from its customers and has to write off as a loss. Write-offs are inevitable in any business that offers credit, but they should be minimized as much as possible, as they directly affect the company’s bottom line and cash flow.

One of the causes of high write-offs is poor AR management, such as failing to monitor and follow up on overdue accounts, neglecting to enforce payment terms and penalties, and not having a clear and consistent collections policy. Another cause is external factors, such as economic downturns, customer bankruptcies, and natural disasters, that can affect the ability and willingness of customers to pay.

To reduce write-offs and recover more revenue, you need to have a proactive and strategic approach to collections, such as segmenting customers based on risk and behavior, prioritizing high-value and high-risk accounts, offering payment plans and discounts, and escalating legal actions when necessary.

Increase in administrative cost in the entire revenue cycle

The revenue cycle is the process of generating and collecting revenue from customers, from the initial contact to the final payment. The revenue cycle involves multiple departments, such as sales, marketing, finance, and customer service, and requires coordination and collaboration among them.

However, the revenue cycle can also be a source of high administrative costs, especially if you use manual and paper-based processes, such as data entry, invoicing, payment processing, and reporting. These processes are not only time-consuming and labor-intensive, but also prone to errors, duplication, and inefficiency.

To reduce administrative costs and increase efficiency in the revenue cycle, you need to adopt digital and automated solutions, such as using cloud-based software, integrating with third-party platforms, and leveraging artificial intelligence and machine learning.

High customer dissatisfaction

Customer satisfaction is a key indicator of how well you are meeting your customers’ needs and expectations. Customer satisfaction can affect your customer retention, loyalty, referrals, and revenue.

However, customer satisfaction can also be negatively impacted by AR mistakes, such as sending late or incorrect invoices, making billing errors, providing poor customer service, and applying harsh or inconsistent collections practices. These mistakes can damage your reputation and trust with your customers, and make them less likely to do business with you again.

To increase customer satisfaction and loyalty, you need to provide a positive and seamless customer experience, such as offering multiple payment options, sending timely and accurate invoices, resolving disputes quickly and professionally, and providing personalized and proactive communication.

Conclusion:

Accounts receivable mistakes can be costly for businesses, as they can lead to wasted time, financial losses, negative impact on customer relationships, and cash flow problems. Some of the most common accounts receivable errors are invoicing errors, miscommunication with accounts receivable team members, and not following up on overdue invoices. You need to define a strategy on how to fix accounts receivable mistakes. To avoid these errors, businesses should use accounts receivable automation, which can reduce manual processes, improve accuracy, enhance visibility, and increase efficiency. Accounts receivable automation software combined with sound cash flow management strategies can help you optimize your invoice-to-cash processes and improve cash flow.