November 14, 2022

What is Accounts Receivable Management?

Denym Bird
CEO of Paidnice

Accounts receivable management (ARM) is the process of managing accounts receivable to ensure outstanding invoices are collected in a timely manner, as well as identifying and avoiding unnecessary delays in payment. There are many challenges businesses must face when it comes to managing their accounts receivable. If you want your business to thrive, you need to have a solid ARM strategy in place. Creating an effective ARM plan will help keep collections high while minimizing expense. Whether you’re just starting out or trying to improve your current system, this article will help you understand the ins and outs of ARM so that your business thrives.

Types of Accounts Receivable

There are three main types of accounts receivable: Exchange receivables are when one company sells goods or products on credit to another company. Exchange receivables are built into the price of the product. When a company extends credit to a customer, it is creating accounts receivable. Internal accounts receivable are generated when one department of your business buys materials or services from another department. Internal accounts receivable are built into the cost of the materials or services purchased. When your business offers credit to customers, you create accounts receivable.

Why Is Accounts Receivable Management Important?

Accounts receivable management is important for a number of reasons. Here are a few of the major benefits: - Strong credit policies attract new customers - If you don’t have a good track record regarding accounts receivable, you could be missing out on new business. If you’re trying to get new customers, a strong credit policy is essential. Potential customers will look at your accounts receivable as a sign of how trustworthy and reliable you are. - It’s important to pay attention to your AR - In order to stay solvent, you need to keep a close eye on how quickly you’re getting your invoices paid. You don’t want to get behind on payments, but you also don’t want to pay bills too early. If you’re focused on getting your own invoices paid quickly, you could be ignoring your clients’ needs.

The Importance of Good Credit and Collection Practices

Credit is an important aspect of ARM. The more seriously you take credit, the more seriously your customers will take you. Additionally, if you’re not collecting on your accounts receivable, you’re not making any money. If you take credit seriously, you’ll make sure your customers’ credit worthiness is taken into consideration when making a sale. A bad credit rating indicates that the person has a history of not paying their bills. It will be harder for you to collect your payments on time. Your payment terms have an impact on your credit rating. Credit is important in every industry; however, some industries rely more heavily on it than others. A doctor’s office may not accept credit, but a department store or car dealership most likely will.

When Should You Start Managing Your AR?

The sooner you start managing your accounts receivable, the better. It’s usually best to wait until you’ve built up enough business to justify hiring a collections officer, though. Once you’ve built up a steady flow of sales and a good reputation, you should start managing your accounts receivable. If you start managing your accounts receivable right away, you might need to deal with some headaches at first. However, it will be worth it in the long run. If you’re just starting out, you’ll have to put in extra effort to build up sufficient business to justify the cost of managing your accounts receivable.

How to Manage Accounts Receivable

There are a few ways to manage your accounts receivable. Here are a few best practices:

Track your AR - Keep tabs on how quickly you’re getting your bills paid. If you’re falling behind, you need to find a way to catch up. If you notice that you’re consistently getting paid late, you need to do some research and figure out where you’re going wrong.

Send statements - Make sure you send statements to your customers every month showing them exactly how much they owe you.

Stay in touch with your customers - You don’t want to be nagging your customers, but you do want to make sure they remember they owe you money.

Set up reminders - If you have a lot of customers, it can be easy to get behind on following up with them. Set up calendar reminders to stay on top of your billing. You can also set up text message reminders if you’re always on the go.

Set yourself up for success

Accounts receivable management is an important part of running a successful business. In order to collect on your outstanding invoices on time and in full, you need to take a proactive approach. If you want your business to thrive, you need to have a solid ARM strategy in place. Creating an effective ARM plan will help keep collections high while minimizing expense.

Denym Bird
CEO of Paidnice
Denym is a software entrepreneur and writes about accounts receivables management for small business.