Money might not make the world go ‘round, but it certainly comes in handy when running and growing a business. Your accounts receivable plays a significant role on that front, making certain you’re adequately paid and on time for the goods and services you provide -- at least in theory.
As crucial as AR is to everything from meeting payroll to R&D, it’s also a pain point for many companies, especially young and less established ones. Still, no matter how big, small, complex, or simple your company might be, accounts receivable is towards the top of the accounting food chain in the importance it wields.
To streamline your AR and give it the impact it deserves, Embark has created our Accounts Receivable Excel Template to help you find and maintain an efficient AR strategy. When coupled with a few hands-on insights from our industry experience, your accounts receivable can become a unique asset that helps propel your enterprise forward.
Accounts Receivable 101
If your working capital is the financial blood that courses through your company’s veins, consider your accounts receivable the heart that makes it all possible. AR is the indispensable conduit between your invoices and balance sheet, telling you what your customers owe you and, consequently, informs the liquidity that helps you grow and keeps a smile on the collective face of your stakeholders.
As you can see from our accompanying AR template, it’s not terribly complicated but still packs quite a wallop. Think of your AR as the mirror reflection of your accounts payable, sharing most of the same descriptors -- customer name, invoice number and date, invoiced amount, payment terms, and more depending on how much detail you choose to include. And like your AP, an overarching strategy to your accounts receivable is the spinach to its Popeye, making it a powerful tool in maximizing your working capital.
A Team Effort
Beyond our basic template and the concepts it represents, your accounts receivable strategy must also be a concerted effort between your sales team, accounting, and finance departments. It should be somewhat flexible without making you a pushover, consistent but understanding of every customer’s needs and situation. Obviously, there’s plenty of gray area in that description that, at least at first glance, might appear to muddy the AR waters. However, utilizing the unique perspectives and strengths of different departments will significantly streamline the process.
Granted, the relationship between a sales team and accounts receivable can get a bit touchy at times, one side wanting to keep the customer perpetually happy and the other trying to get that same customer to pay their bill. There’s no need for any acrimony, though, as communication can ease darn near any wound. Embark suggests semi-frequent meetings between your sales team and numbers folk, where they can discuss individual accounts and review critical KPIs like the number of past-due accounts and the frequency of payment term overrides by your sales team.
Get all of that out in the open and let your accountants and finance team show your salesforce the detrimental effects of past-due accounts to the entire organization. Foster an all-for-one and one-for-all attitude to alleviate much of the friction between the two departments. If you find such an approach effective, you can even include it in your month-end checklist to make sure it doesn’t fall by the wayside.
Accounts Receivable Best Practices
Aside from the team approach, a handful of other tips can help transform your AR into the dynamo you want it to be. From establishing balanced expectations between you and your customers to collections and data management, these best practices will help smooth your receivables process and make the most of your working capital.
Establish Credit Guidelines
No two customers will ever be exactly alike. Newer ones might start with small, infrequent orders that don’t represent a significant risk to you, while others are behemoths with massive orders that occupy a healthy portion of your operations and capital. Obviously, credit between these two opposites can vary quite a bit. Establish and maintain credit guidelines that find a balance between risk mitigation and customer satisfaction.
Use background and creditworthiness checks when appropriate and give enforcement jurisdiction to your finance department, not sales. Be quick but thorough with your approval process and remember to occasionally revisit a customer’s creditworthiness, as a company’s financial health can and does change over time.
Take Control of Your Data
At some point, you’ll outgrow our AR template and require a more comprehensive and integrated system that automates and streamlines your AR process. As your customer base grows, data entry can wreak havoc without an adequate accounting system, proper internal controls, and data management.
For instance, an honest mistake like sending an invoice to the wrong address not only delays payment, but can also damage your brand and reputation. Once you have your accounting and data systems in place, conduct occasional audits to look for abnormalities in payment terms, credit limits, or purchase discounts.
Tighten Your Collection Process
Some companies view collections as a necessary evil, others revel in them. No matter your perspective, collections are vital to your financial well-being and require a strategy all of their own. Start by developing sufficient processes that generate the metrics and reports you need to make sound decisions on collections. It’s hard to collect on past due accounts when you’re not even sure which ones are past due in the first place.
Also, specific training in the skill set needed for effective collections is another important component that companies often overlook. Between proper training, a proactive approach, timely and accurate reporting, and clear, concise, and consistent policies regarding payment terms and other factors, collections can be a strength rather than a point of contention.
Integrate our Accounts Receivable Excel Template and best practices into your own accounts receivable strategy to shore up your capital and provide your enterprise the fuel it needs to grow. As you already know, Embark is an invaluable partner that can help you stay on track as you expand, providing our expertise on the controls, processes, and technology that can help unlock your enterprise’s potential.