Introduction
You might be interested to hear that, on average, an organization writes off 5% of its account receivables as bad debt each year. Thus, in logistics organizations where cash is the vitality, account receivable management may be essential to development or survival. Information on potential account receivable issues is critical for a company’s effective operation and financial health.
Accounts receivables refer to the amount of money owed to the company by the customers for the goods or services that have been purchased on credit. For proper management of cash flow and proper running of businesses, it is very important to manage these receivables well. In this article, we will highlight the most frequent account receivables issues and how you can solve them.
The Major Account Receivables Challenges
Delayed Payments
Another major problem of account receivables is that payments are often delayed. Delays in payments may stem from improper invoicing procedures, monetarily struggling clients, or bad payment habits. Consequently, delayed payment can adversely affect a business’s cash flow and create payment difficulties for the company.
Customer Disputes
Customer disagreements on the received invoices may lead to delayed payments and extra paperwork. This could occur due to variances in the prices charged on invoices, wrong account details, or issues regarding the quality of products or services delivered. It is crucial to address these issues as soon as possible and ensure that clients do not experience long payment delays.
Credit Risk
Measuring and controlling credit risk is crucial to avoid cases of bad debts and to make sure that the customer will be able to pay for the goods and services. Failure to manage credit risk means that debt may be granted to customers who will be unable to pay, implying high potential losses for the business. Appropriate credit policies and customer credit evaluation are critical to avoiding credit risk.
Inefficient Processes
Delays, errors, and increased administrative costs may occur where the receivables management processes adopted are inefficient. Some of the weaknesses that businesses have to deal with include manual data entry, absence of processes and controls, and poor monitoring of receivables. Optimizing these activities with the help of automation and setting certain standards for their implementation may prove highly beneficial.
Data Inaccuracy
Outdated data in account receivables is likely to result in billing issues, disagreements, and delayed payments. Some of the causes of inaccuracy include; manual data entry mistakes, poor data verification, and obsolete customer data. Record keeping and data validation checks are very important when it comes to receivables management.
High DSO (Days Sales Outstanding)
DSO is important as it calculates the average number of days taken for a business to receive the payment from a sale. For instance, a high DSO means that the company is taking a long time to recover its receivables and this can exert pressure on its cash flow. The following is involved in managing DSO: Proper billing and collection procedures, and offering repayments to customers who make early payments.
Unapplied Payments
This is when payments received from the customers are not properly associated with the outstanding invoices. This can create inconsistencies in the recorded accounts receivables and make it challenging to conduct a reconciliation. This issue can be rectified by making proper payment remittances specific and detailed and by reconciling accounts from time to time.
Fraud and Errors
Fraud and errors in account receivables management entail considerable financial losses. Fraud risks and errors have to be recognized and avoided to preserve the reliability of receivables records. These risks can be managed by putting in place proper internal controls, carrying out regular audits, and adopting various anti-fraud measures.
How to Deal with Accounts Receivable Challenges?
Establishing Clear Payment Terms
Outlining payment terms is important when dealing with clients to minimize problems caused by late payments. Businesses should clearly state and agree on payment terms with their customers on the required payments, their due dates, and whether they have to pay extra for paying later or receive discounts for paying earlier. The existence of clear terms prevents misinterpretation of the contract and informs customers of the amount of payment expected from them.
Implementing Automated Invoicing Systems
With the use of automation, there is a great reduction in the time required to do the invoicing. Electronic invoicing systems cause invoices to be issued on time and are accurate minimizing delays and errors. These systems are also beneficial in that they can send out payment reminder messages to customers to facilitate faster payments.
Regularizing Review and Update Credit Policies
Credit policies should be reviewed periodically and adjusted accordingly in light of the prevailing credit conditions and customer trends. It is crucial for businesses that offer credit sales to evaluate the ability of the customer to repay and determine credit limits based on the customer’s financial stability. This is because policies should be updated frequently to be relevant in controlling credit risk.
Enhancing Customer Communication
There is always a need to communicate with customers so that they pay within the required time and address any complications. Daily contact facilitates the development of strong customer relationships as well as creates an environment that makes customers conscious of their payment responsibilities. They should issue clear invoices, respond to questions or complaints effectively, and not enclose the conversation. One of the other practical ways of avoiding the problems that may arise from interaction with clients is the use of a logistics outsourcing service.
Utilizing Modern Technology Solutions
Old-age systems and technologies are a hindrance to the efficient management of receivables. Adapting current technological solutions, for example, improving receivables management software, allows you to make a process more efficient, accurate, and effective. These systems provide features of automation, and tracking of receivables in real-time and include analytics, thus giving a full picture of receivables.
Conducting Regular Audits and Training
Receivables management is an area that needs to be audited periodically to pinpoint possible problems in the workflow. Audits confirm conformance to policies and standard practices, reveal poor practices, and any incidences of fraud. Furthermore, staff training is an ongoing process to develop and maintain expertise so that employees are knowledgeable about best practices and tools.
Conclusion
The management of account receivables is a critical factor in the liquidity and therefore the financial well-being of a business. This paper discusses some of the issues that firms encounter in managing account receivables including delayed payment, customer complaints, credit risk, and inefficiencies, which if managed properly, allow firms to maximize their account receivables. The best strategies for overcoming these challenges include the adoption of contemporary technological practices, accurate record-keeping, and staff development.
Are you ready to regain control of your accounts receivables in logistics and enhance your cash flow? Contact us right away to find out how we can help with your account receivables!
