Accounts Receivable Challenges Of Every Business!

Accounts Receivable Challenges Of Every Business!

Meet Mike.

Mike was running a successful business with good cash flows and it was going all well until many of his customers defaulted payments in large numbers something he wasn't prepared for. Mike had to borrow funds to meet operational expenses which increased the cost of doing business thus putting his business at risk.

What could have caused the accounts receivable challenges for Mike? Let's do a case study.


Weak Enforcement

"Mike wasn't enforcing his customers to pay within the payments terms and was ok with delayed payment".

Most businesses offer services on a credit basis where an invoice is raised on a specific milestone and customers pay these invoices on agreed timelines. Businesses and customers will typically have mutually agreed to timelines to make the payment also called Net D.

For example, Net 30 indicates that the net invoice amount is expected to be paid in full within 30 days of the Invoice Issue date. Net 10, Net 15, Net 30, and Net 60 are some of the common payment terms in practice.

What You Can Do?
Review and agree on comfortable payment terms that meet customers' payment cycle. Enforcing payment terms that don't meet customers' business models will result in delays. Identify customer payment challenges and design strategies to enforce adherence to the payment terms.


Lack of Monitoring

"Mike wasn't monitoring cash flows and related statistics, He wasn't noticing that his month-on-month Days Sales Outstanding (DSO) kept increasing."

Many businesses miss the insights from the account receivable data that provides early warning signals. Some of these insights can provide views on business-level cash flows while others can also be derived at the individual customer level.

Below are some of the metrics that need to be monitored, and measured to ensure corrective actions can be taken upfront.

DSO is about how quickly money is collected after an invoice is issued. A healthy DSO does not exceed your terms by half for example if the payment term is Net 30, then a healthy DSO is 45 Days

How To Calculate DSO :
(average accounts receivable ÷ billed sales) x number of days


  • Best Possible DSO

Best Possible DSO considers only current accounts receivable and not past data. It indicates what your on-time payment turnaround is going to be.

How To Calculate the Best Possible DSO :
(current accounts receivable ÷ billed sales) x number of days


  • Average Days Delinquent

Average Days Delinquent (ADD) is a metric that lets companies know the average number of days those late payments take to get collected. The lower your ADD score, the better.

How To Calculate Average Days Delinquent :
DSO – Best Possible DSO


  • Turnover Ratio

Your accounts receivables turnover ratio or Debtor turnover ratio shows how well you manage the credit you extend to your clients and how efficient you are at collecting payments. The higher the ratio the better.

How To Calculate Turnover Ratio :
Total sales for the period ÷ ((receivables at the beginning of the period + receivables at the end of the period) ÷ 2)


  • Collection Effectiveness Index(CEI)

CEI helps to understand how strong your accounts receivable management is. The closer the CEI is to 100%, the better your processes.

How To Calculate Collection Effectiveness Index :
(beginning receivables + monthly credit sales – ending total receivables) ÷ (beginning receivables + monthly credit sales – ending current receivables) x 100


Ineffective Communication strategy

"Mike was following up with the point of contact from customers on an ad-hoc basis and more of informal reminder, he was using offline follow-up techniques like emails"

Following an ineffective communication strategy and doing informal communication will give the customers the view that the receiving organization is fine with delays. Moreover, most of the time the follow-up happens with the same person and doesn't follow the escalation route when the same doesn't give the expected outcome.

What You Can Do?
Adapt a suitable dunning process where communications progress from gentle reminders to effective letters and phone calls, emphasizing the need to make payments on time.


Poor and Decentralized AR Management

"Mike had a team of 3 people working on the accounts receivable process and each of them was capturing AR information locally. There was no single place to audit the conversation, commitments, and next planned actions. The same became a people-centric process."

Businesses lose control of account receivables if they are not able to track them centrally or audit the communications happening with the customers. Typically businesses follow up via several mediums like emails, letters, calls, and SMS. The follow-up information is split across several devices and calls are not recorded/transcribed thus making it difficult to audit or use as evidence for any legal proceedings.

What You Can Do?
Adopting a centralized accounts receivable system is key for any business to get a view of the overall status of account receivables plus monitor follow-up status. Centrally recording the follow-up helps audit as well as removes people's dependency and enables the user to understand the background of conversations to help lead better the next conversation.


Irregular Promise Tracking

"Mike was not driving the customers to provide a Promise date for making payments and not tracking closely whether the customer had made the payments as per the promise"

One of the common mistakes that a business makes is that they don't drive the conversation with customers to provide a promised date by which the payments will be made. More damage happens when there is no follow-up or tracking to check whether the customer kept the promise by making the payment.

What You Can Do?
Equip a "Promise To Pay" feature in the dunning process and the same has to be recorded formally via email/letter to customers. Send reminders before the promised date and perform a more rigorous strategy in case the customer doesn't keep the promise.


Lack of Payment Options and Incentives

"Mike had provided bank deposits as the only means of payment and that became challenging, especially during lockdowns. He didn't offer any incentives or discounts as well for on-time payments"

Customers have their own preferred payment channels, and enforcing limited payment options will have a negative impact on their payments. Also, customers typically tend to pay towards the end of payment terms as they can hold liquidity till that time and there is no benefit to making early payments.

What You Can Do?
Offer multiple payment options and you are more likely to get paid faster. Offering incentives also encourage customers to pay early like offering 2/10 Net 30 which states that a discount of 2% is applicable if paid within 10 days for 30 days payment term.


Time-consuming Interactions

"Mike's customers have several Invoices/bills to be paid, and the same is shared via emails and letters. Customers typically respond to queries or requests via email most of the time and that can be quite time-consuming"

Interactions in the accounts receivable process typically occur through emails and letters which are discrete by nature. Customers need to refer to multiple email threads or physical letters to get details of their overdue. This can be tedious as well and the same goes for responding to these emails as well.

What You Can Do?
Provide customers with one consolidated view of overall outstanding dues with various embedded options such as digital payment options, messaging options, promise request features, etc. Digital interactions via the Customer Portal can bring transparency as well as a seamless one-stop for all overdue queries and actions.


Accounts Receivable Disputes Negligence

"Some of Mike's customers had raised disputes on incorrect Invoices and also on the quality of services rendered and he wasn't able to handle them properly."

Customers typically will hold the payments till the disputes are resolved or corrected. Disputes can also worsen the relationship with the customers, bringing in friction and making it much more difficult to collect payments leading to bad debts or credit risks.

What You Can Do?
Track disputes effectively and reviews the process to address billing/payment or service concerns thereby paving the way for better customer experience and faster payments.


Lack of Credit Scoring

"Mike was providing services to customers irrespective of the repeated payment delays, with increased AR delinquency levels."

Customers belonging to various industry sectors have different levels of risks involved, for example, the Logistics and Hospitality sector impact due to the pandemic, etc. Lack of credit scoring at the customer level will increase exposure to bad debt and put businesses at a bigger risk.

What You Can Do?
An effective accounts receivable software should score the customers based on the sector, behavioral, environmental, and other relevant factors. A customer with a bad credit score or risk profile needs a review of the payment cum credit terms.


Accounting Challenges

"Mike was not updating the payments received in the banking books against the accounts receivable process on a regular basis."

The lack of a real-time payment interface and reconciliation with the accounts receivable process will cause an incorrect dunning process, resulting in an unpleasant experience for customers.

What You Can Do?
Offer a digital payment and reconciliation process that updates the due amount in real-time at the customer cum invoice level. This reduces manual reconciliation errors and helps the accounts receivable automation process.


Tackling all these challenges can get overwhelming and tedious for anyone, that's why it's best to invest in accounts receivable automation software for your business.

Start automating your accounts receivable process right away with our Accounts Receivable Automation Software - Maxyfi, and watch your business thrive!

For more tips on how to tackle the challenges in your accounts receivable process, follow our Maxyfi blogs.



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