If you’re struggling with late payments, it’s easy to think that it’s the biggest problem facing your accounts receivable (AR) department.
That isn’t the case.
Slow-paying customers and ballooning days sales outstanding (DSO) are a symptom of unhealthy AR, but they aren’t the cause. For healthy accounts receivable, you need to address the underlying issues that lead to late payments.
Bad data and siloed systems
Let’s start with two intimately related issues. Bad data and a lack of transparency due to siloed systems are individual, yet interconnected problems that can plague your receivables management.
If you conduct AR like most companies, you’re probably using a lot of disparate systems that don’t always communicate with each other. Beyond software solutions, data may be stored on individual spreadsheets or held by individual employees or departments. In some cases, you may even be working from paper records.
All of these methods are an impractical and inefficient way to conduct business. Time is wasted searching for relevant records and hoping that they haven’t been misfiled or lost. Even when you do locate the correct data, it typically must be manually input into a system, opening the door to data entry errors.
Research indicates that bad data costs organisations an average of $15 million a year.
All of that labor distracts from what your AR team is best at doing. Working directly with customers to expedite cash flow, while building and maintaining relationships.
This lack of transparency can also lead to communication problems or invoice errors that cause disputes, which in turn creates payment delays. In the worst cases, they can even escalate into issues requiring intervention from management.
To eliminate this issue, it’s vital to adopt an accounts receivable solution that communicates and integrates with the rest of your tech stack. It should be able to seamlessly gather information from your CRM (Customer Relationship Management) software, as well as your ERP (Enterprise Resource Planning). This eliminates the possibility of manual data entry errors and ensures that if a dispute arises, members of your AR team can quickly gather the needed information to resolve the issue.
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Inconsistent collections practices
Another problem that frequently plagues AR teams is a lack of structure and strategy when it comes to the collections process. The leading culprit in this? Manual receivables.
Companies using a manual means to prioritize their collections take 30% longer to follow up on invoices than those employing automation!
Many teams using manual AR take a reactive approach to collections. That is, they wait until an invoice is already past due before focusing on follow-ups. The problem? By that point, the payment is late, so the team is already working from behind.
This can also lead to large numbers of past-due invoices, overloading your collections team and forcing them to pick and choose what to focus on. As a result, certain invoices will inevitably fall through the cracks, meaning you’ve lost money.
The most effective way to handle this program is to adopt AR software that makes use of predictive analytics powered by AI and machine learning to help guide your collections practices. These solutions analyse all of your customer and payment data, looking for patterns in customer payment behavior. Using algorithms, they determine which invoices are most likely to be paid late. On top of this, they also determine just how late the invoice is likely to be.
Using this information, your team can place a higher emphasis on following up with accounts that are likely to pay late, giving special attention to those who are most likely to be seriously delinquent. This proactive approach keeps your team ahead of potential issues.
However, it isn’t enough to simply have the right data. You also need the technological means to efficiently act on it. That means finding a solution that provides automated and tailored workflows to help manage the collections process from the moment an invoice is sent until it is finally paid.
Misapplication of payments
It isn’t enough to simply get paid. Once you’ve received a customer payment, you must apply the cash. Until that is complete, the money is essentially non-existent.
According to IOFM, 50% of B2B organisations still rely on manual cash application.
Manual cash application is not only slow; it’s error-prone. A simple typo can lead to the misapplication of a payment. When misapplied, it can appear that a customer has not submitted a payment when they have, driving up your DSO.
It also leads to unnecessary follow-ups from your collections team. Even worse? If your customer has reached their credit limit, it may put their account on hold, making it so they cannot place any more orders with your company.
With 96% of customers stating they will switch vendors due to poor service, mistakes in cash application don’t just threaten your DSO, but the long-term value of your accounts.
To combat cash application issues, it helps to use an AR software that automates the process. Advanced cash application solutions will automatically capture remittance data and match customer and invoice data in real-time. This is then used to reconcile payments with open items and apply the cash back to your ERP. Not only does this automation greatly reduce the potential for errors, it also expedites the process.
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Limited payment options
The nature of payments is changing, and these four statistics provide a clear picture of where the process is headed.
- According to McKinsey, 9 out of 10 Americans are now using some form of digital payment
- The Global Bank states that two-thirds of adults worldwide make digital payments
- A study by NICE found that 81% of customers want more self-service options
- Juniper Research predicts that cross-border payments will exceed $40 trillion by the end of 2024.
The days of customers mailing in payments, or calling in to make payments over the phone, are all but over. Today, customers want the convenience to make payments when and how they want, and that means self-service options that allow for digital transactions.
In addition, the ability to make cross-border payments in the customers' preferred currency is no longer a luxury, but a necessity.
By failing to adopt these options, organizations make it harder for customers to remit payments, increasing the likelihood of overdue invoices or the chance that a customer may take their business elsewhere.
To avoid this situation, accounts receivable teams should adopt an AR solution that provides customers with a self-service portal where they can view invoices, make payments using their preferred method and currency, as well as take other relevant actions on their accounts.
Want to discover more practical steps to better accounts receivable? Check out 5 Features of the Perfect B2B Payment Process.
