Accounts Receivables Management (ARM) is a financial process that helps companies to manage, track, process and collect all accounts receivables. The objective is to convert receivables into cash as quickly and effectively as possible.
The ARM processes of a company usually include:
- Customer risk assessment and credit extension processes
- Sales documentation - accurate, complete & timely invoicing
- Focused follow up with the customers or branch or sales (account) managers to realize sales proceeds within the due dates
- Correct application of receipts, ledger a/c & TDS reconciliations
Why is accounts receivables management important
Accounts receivables represent the single most important source of cash for all organizations offering trade credit; and cash we know is the lifeblood of an organization.
Naturally then a strong, well-organized ARM function becomes a critical function for companies. Not only does it facilitate quick and effective collections, it yields many other benefits to a company. Together these benefits translate into superior organizational value.
Poor ARM, on the other hand, exposes a company to great financial risk. Risk in terms of bad debts, cost of money, administration and follow up costs. Often these costs are disguised. Check, you might be suffering from them too?
Given these facts you would presume that most companies would have a good ARM system in place. Not really. Effective ARM represents a very difficult challenge, a challenge most companies are unable to meet.
Accounts Receivables Management – a difficult challenge
ARM poses a difficult challenge for companies on many counts.
The ARM process has to:
- Balance conflicting priorities- sales v/s bad debts, cash generation v/s charge offs, profitability v/s market shares, credit sales v/s risk tolerance etc.
- Handle the consequence of practices and processes of other departments- If a customer is dissatisfied with a product/service he might not be willing to pay for it.
- Operate at near 100% efficiency levels- companies expect to recover near 100% of their accounts receivables, 90% within 10-90 days of the due date, and that too at a very nominal cost.
To meet the ARM challenge effectively companies need to invest time, talent, infrastructure and technology. However, it isn’t easy to spare these resources; which is probably why “inefficiencies in own process” account for 70% of AR delays in a typical company.
Hiring an ARM specialist makes maximum sense in such a scenario.
Common Accounts Receivables Management errors
It would be wonderful if everyone simply paid their invoices immediately. However, in business, you need to diligently collect and follow up on accounts. Below are some of the common mistakes that can slow down and hinder the process.
- Making payment application errors
- Not sending invoices promptly
- Not having a standard policy
- Not having thorough follow up
- Not updating your database regularly
- Failing to address problems early on
- Accepting the run-around by customer
- Not increasing the level of your collection attempts