Accounts receivable (A/R) represents clients’ debt, or what they owe for goods or services. Keeping track of this debt is an ongoing and tedious chore, and many entrepreneurs prefer to delegate this process to outside professionals. According to Forbes, A/R is one of the most common operations that businesses outsource to other companies. Business leaders understand that delegating time-consuming tasks is the key to increased profitability – that’s why an impressive 71% of CFOs outsource at least one or more low-priority operations so they can focus on more profitable areas. Let’s explore how accounts receivable outsourcing enhances your companies’ performance.
Why Is Directing Your Focus Towards Accounts Receivable Management Essential?
Of all the steps in a commercial transaction, getting paid is the most crucial to a business’s survival. When a business is waiting on too many of its clients to pay, its cash flow can become critically weak, leading to all sorts of headaches. Instead of waiting endlessly for customers to settle their bills, your business needs an effective A/R team that helps you get paid in a timely manner. These specialists are tasked with controlling the expected capital inflow (billing) and enacting measures to receive payment from clients.
When a client is late in paying for services and goods, it is the A/R team that seeks out and collects payment. A/R specialists also correct invoices and find and eliminate inaccuracies when tracking debts. Furthermore, A/R experts may also be responsible for reviewing clients’ requests for reimbursement and credit by properly adjusting accounts.
In addition to these responsibilities, A/R specialists protect the company from non-payers, particularly when clients seek out credit. They monitor customers’ creditworthiness and help ensure that the company only extends loans to solvent counterparties.
Some companies assign additional responsibilities to their A/R team, such as drafting financial documents and creating forms for buyers, including invoices. In a modern company, the A/R department fulfills all of these responsibilities with IT-system support.
Keeping proper financial records is time-intensive and small mistakes can be costly. BooksTime makes sure your numbers are 100% accurate so you can focus on growing your business.
Key 5 Benefits To Outsourcing Receivables
It is difficult to overstate the importance of an effective receivables management system, especially for small businesses. The recent pandemic and subsequent market downturn provided a memorable cautionary tale, as economic chaos threatened small businesses of all kinds. According to a 2020 study of the economic impact of the Covid-19 pandemic, 43% of small businesses in the U.S. had to temporarily shut down operations. Furthermore, out of all the enterprises surveyed, 25% of firms had enough capital to cover less than 30 days of expenditures, while 50% could cover one to two months of spending.
These numbers send a sobering message: in an age of uncertain markets, it is more vital than ever for businesses to receive timely payment. That’s why your small business needs a successful system for tracking counterparties’ obligations, particularly through accounts receivable outsourcing. Let’s go over the benefits of delegating these services.
Benefiting from cutting-edge A/R practices
Professional A/R services provide an effective and streamlined process to help you get paid on time, while generating the working capital your business needs to operate. While there is no single correct A/R workflow, these experts use a variety of advanced solutions tailored to your organization’s industry and scale. Delegating to a reliable outsourcing company offers the following benefits:
- Objective evaluation of existing A/R procedures.
- Correction of discrepancies in accounts.
- Generation of economic documents to define future earnings and liquidity.
- Improvements in credit policy, cash flow, etc.
With professional A/R monitoring, you will be able to identify any gaps in your A/R workflow and compare your system to industry competitors.
By delegating A/R tasks, it is possible to decrease your enterprise’s day sales outstanding (DSO). This metric shows how long it takes for your business to collect payments from customers. Drawing on their collective knowledge and skills, your chosen outsourcing firm will develop an optimal system for debt collection and reducing your organization’s DSO. When establishing contract conditions with financial firms, some companies aim to decrease DSO by 10, 20, or more days.
Fast and accurate billing through automation
Studies indicate that about 90% of Excel spreadsheets contain errors due to manual data entry, which increases DSO and negatively impacts a business’s cash flow. Errors such as billing delays and inaccurate records of user information are common, but they can be avoided with an automated accounts receivable system. By outsourcing, you gain access to these digital solutions, which are set up and operated by seasoned financial experts. This allows for automated A/R processes that safeguard your company from costly errors and delays at no additional cost.
Decreasing labor costs
Labor is a major expense. As your outsourcing firm manages receivables and related automation needs for your company, it can reduce or even eliminate the need to set up an in-house AR department. This saves you money that would otherwise have to be spent on salaries, office space, payroll taxes, and other costs. Some outsourcing companies offer additional labor-saving opportunities. For example, companies like DATAMARK, Inc. often manage mailrooms and scanning for its clients.
As your business expands, you can instantly scale up your procedure for A/R collection without worrying about recruiting and training additional workers to meet growing needs. Your outsourcing firm will handle everything for you!
Many companies experience a workload that is unevenly distributed across the sales cycle. For example, most U.S. companies experience seasonal fluctuations or group closings in the final weeks of the financial year. This leads to a varying workload for the A/R team and requires varying quantities of labor power. Coping with these fluctuations as an organization can be difficult, especially if your business is taking on new or temporary employees that require additional training.
Thanks to A/R outsourcing A/R, you significantly lessen the difficulty of matching headcount to volume of work. Your chosen firm can easily accommodate an increased workload without recruiting additional staff or raising payroll costs.
Potential Risks Of Outsourcing Accounts Receivable
Customer trust is the biggest value, and hiring an outside company to oversee such a precious relationship involves some level of risk. If you delegate to the wrong firm, the incompetence of complete strangers may ruin your long-term business relationships and jeopardize your company’s prospects. Some possible downsides of outsourcing A/R services include:
- Reduced privacy: companies that have outsourced A/R report that while outsourcing makes it easier to get paid, it can create additional difficulties. A less reliable firm may not protect the confidentiality and security of financial data, whether it be data about your client base or internal information about your organization. If you are an entrepreneur who is considering outsourcing A/R or other financial reporting tasks, you should do your research and choose a trustworthy outsourcing firm; specifically, one that uses reliable data protection technologies and does not transfer confidential information to third parties.
- Distance from clients: unforeseen difficulties can arise when your staff no longer manages the complete cycle of customer relationships. For example, you may not know that a customer is dissatisfied because they didn’t share their complaints at the time of payment. Plus, some company executives complain that because the staff does not know which goods have already been paid for, it takes longer to resolve problems for customers.
You can avoid these risks by partnering with an experienced and reputable outsourcing firm. Your best bet is to find a firm with the ideal mix of A/R methods, skills, credentials, and expertise.
When Your Organization Needs Accounts Receivable Outsourcing
In some circumstances, it is particularly wise for businesses to delegate A/R to an outside company. Let’s look at a few circumstances in which entrepreneurs profit from these services:
- If your organization is experiencing rapid development. As your business grows, the volume of invoices and payments increases. With an increased A/R workload, you may face additional operational costs.
- If your in-house bookkeeping department is under strain. If your financial specialists are struggling with the volume of tasks, including A/R, your business can experience accounting errors and delays in processing payments.
- If your business is having problems with capital flow. If delinquent invoices are jeopardizing your cash flow, it is best to delegate to an expert who can quickly solve the problem before it threatens your business.
- If you want to cut your organization’s overhead. It’s expensive to maintain an entire finance department. If you want to avoid these costs, A/R outsourcing can be an ideal alternative.
According to statistics, enterprises allocate approximately 1.5% of their receivables as irrecoverable debts. Notably, 93% of all business downfalls are caused by late customer payment, and late credit sales are as high as 47%. To mitigate the potential pitfalls associated with these alarming statistics, outsourcing receivables is the best strategy.
Tips On How To Improve Your Receivables Management Through Outsourcing
Delegating A/R services helps you work more effectively with your company’s resources. To achieve this, A/R specialists at your chosen firm will make strategic improvements to your A/R system. These improvements include:
- Proper invoice management: bill generation, distribution, and updating systems are the most critical services in receivables management. Outsourcing firms easily and routinely generate invoices, taking into account the date of delivery of goods and services. In order to ensure that customers receive and pay bills on time, it is best to send payment documents by email.
- Various forms of receivables analysis: You can’t practice effective A/R management if you don’t have a thorough understanding of your company’s operations. In order to obtain helpful insights on receivables, experts recommend using financial analysis technology for business segment research, aging control, and client area estimation.
Happy buyers are your most important assets, but it takes work to keep them satisfied. That’s why it’s important to use a variety of tactics to maintain positive relationships with buyers. Not only does this increase the frequency of repeat customers, but it also reduces the likelihood of late or missed payments. For example, you might occasionally contact your customers to ask if they are satisfied with your collection tools or if they have any suggestions for the billing process.
In order to enjoy the opportunities of accounts receivable outsourcing, you should focus on finding a reliable firm capable of taking over these tasks. Thanks to the proper provider on your side, you will receive professional accounting services backed by advanced techniques and automation. That’s why 24% of small enterprises in the U.S. trust third-party firms with their finances.
BooksTime’s skilled team of bookkeepers and accountants will ensure correct billing, timely payment, and up-to-date capital flow data to assist your business. We work around the clock to help businesses achieve the strongest possible financial foundation and offer services tailored to the unique needs of your enterprise. Contact us to learn more about how our A/R services optimize operations, stabilize cash flow, and increase profitability.