How Payment Processing Improves Accounts Receivable Management

Have you ever wondered why so many business owners put 99 percent of their effort into making sales and only 1 percent into collecting the funds those sales generate? Part of the reason is human nature and the natural tendency to rest on one’s laurels after achieving a major goal, like selling goods and services. It’s a sad fact of modern commercial enterprise that accounts receivable management suffers from neglect and unacceptably low levels of automation.

Fortunately, acknowledging these problems is all it really takes for entrepreneurs to ramp up A/R management. What’s needed? A strong dose of attention and an even stronger measure of automation, in the form of payment processing (PP). It’s a fact of doing business that you need to get paid for what you sell. Owners who need an app to help with payment processing will have to look long and hard to find one that gets the job done. The good news is that such applications exist and are competitively priced. For best results, it pays to remember the four-step process of a typical sale and visualize where and how payment processing fits into the big picture.

  • Advertise and promote in order to sell goods and services
  • Make sales
  • Bill customers
  • Collect funds

The Role of DSO

Small and large companies measure the efficiency of accounts receivable management with a metric known as DSO, which stands for days-of-sales-receivable. There are various ways to calculate DSO, but the thing to remember is that it has a sweet spot and should never be too high or too low. When it’s too high, you’re not collecting fast enough from customers. If it’s too low, then you’re probably pushing too hard for immediate payment, a sure way to alienate otherwise loyal buyers.

Payment Processing is Central to A/R Management

It’s obvious that you can’t process a payment until it comes in, so why is this step such a vital part of the A/R cycle? The answer surprises many people: the way a company processes payments has a huge effect on how quickly, and sometimes whether the customers pay. The utilities industry offers an excellent example because electric companies discovered long ago that when they offer multiple, simple online payment methods to customers, payments come in much faster, delinquencies go down, and surveys indicate that customers view the company in a more positive light.

How Payment Processing Resolves A/R Management Problems

Something as simple as a web-based payment portal that accepts credit cards can make a big difference in streamlining A/R. Here are some of the key ways that PP improves the way business owners manage A/R:

  • Bills are collected faster
  • The cost of collection goes down
  • More people pay on time
  • Delinquencies go down
  • Customer loyalty goes up

Automation is the Icing on the A/R Cake

When managers automate the payment processing function with things like timely email reminders to every customer, clickable in-main links that lead directly and seamlessly to payment portals, and follow-up notices via e-mail or snail-mail after a designated amount of time, and other pertinent methods, the whole A/R cycle moves more smoothly. There’s no reason to neglect payment processing. The first step should be finding a suitable application that fits in with the rest of your company’s business programs.

Key Ways to Streamline A/R and PP Cycles

Unfortunately, far too many owners emphasize bottom-line income and give little thought to ongoing cash-flow, which is the real life blood of any enterprise. Income figures only tell part of the story, like a vital sign during a medical exam. Temperature, heart rate, and other physiological snapshots offer a quick look at the current state of health. But doctors rarely rely on that information alone to assess overall health of a patient. It’s the same thing with a company.

High income is great, but it could be in danger of falling if proper A/R and PP systems aren’t in place. For long-term sustainability, organizations need to look at the big picture and understand why and how income is what it is. That means doing what it takes to get A/R under control by rooting out past due invoices and minimizing collection problems. Why is this kind of timing so essential? Because receivables deteriorate in value with each passing day, particularly after 90 days. Streamlining PP and A/R cycles is an effective remedy for all sorts of financial and cash-flow ills. Here are some strategies for taking hold of the situation and making constructive changes:

  • Alter terms of payment: Change from net-30 to “due immediately” and your collection time will shorten significantly. How is this possible? By sending email messages rather than paper ones (see below), your company totally alters the payment scenario. Customers can pay online or over the phone the day they receive the invoice, and if you allow them to pay with credit cards, debit cards, cryptocurrency, and other ways, you stand to bolster your entire payment processing cycle.
  • Add payment options: Study after study has proven that when customers have more ways to pay, they pay faster. Consider adding as many possible payment methods as you can, including credit cards, debit cards, checks, checks-by-phone, snail-mail money orders, cryptocurrency, and online payment processors like PayPal.
  • Streamline invoicing: Go paperless and watch your entire invoicing system speed up. The first step is double-checking email addresses so notices don’t go to the wrong person or simply get lost in cyberspace. Let all customers know that you are going to a 100 percent email routine so they’ll be watching their in-boxes for regular notifications. The main advantage here is that people learn instantly how much they own, when it’s due, and what the terms of payment are. There’s no delay and minimal risk of a lost notice.
  • Tighten credit policies: This is the source of many A/R problems. Companies that offer easy credit tend to bring in customers who have trouble paying the bills. When you tighten your initial credit-granting policies, you’ll see fewer customers who pay slowly or require collection activity.
  • Use a collection professional: This method should only be used as a last resort because the fees are extremely high. Many companies only resort to agency collectors when individual past-due account balances are high and there’s little chance of payment.
  • Revise the billing cycle: There’s a tradition in the accounting profession called end-of-month billing. It needs to be changed because it drags down revenues by slowing the overall payment process. Change your company’s billing cycle from end-of-month to one that is project-sensitive. In other words, when a project ends, send out payment invoices immediately, no matter what day of the month it is.
  • Outsource key functions: One way to deal with the entire PP and A/R dilemma at once is with an outsourcing solution. Hiring someone else to take on the headaches can be an economical way to ramp up revenue by focusing on your organization’s core strengths.
  • Improve customer relationships: Long-term, satisfied customers are worth their weight in gold. They’re a hard-to-quantify, intangible asset because they help spread the company’s message and often act as unpaid, volunteer brand ambassadors. Treat your clients well and you’ll be nurturing this important relationship. What’s this have to do with PP and A/R? When your firm owes money or goods to a current customer, pay them immediately and remember to send a polite email message as a reminder of how much you value their loyalty.

Minimizing delinquent accounts is the secret to improving cash-flow and eliminating long-term challenges related to accounts receivable and payment processing.