Challenges of accounts receivable management
Managing accounts receivable can take place in different phases in the process. Many businesses issue an invoice, usually with the payment due within 30 days, and wait for payment to be made. When a business has many outstanding invoices and payments are made past the invoice due dates, it has a negative impact on cash flow.
Research conducted by Moula revealed that late payments are a big problem for SMEs. This included 63 per cent of SMEs saying that late payments have a negative effect on their cash flow and 40 per cent of SME customers paying later than 30 days, regardless of the agreed payment terms.
Regardless of the type of business you’re in, the aim should be to get paid as quickly as possible and avoid bad debts.
Ways to manage accounts receivable
Most of the ways your business can manage accounts receivable is reactive. These include outsourcing accounts receivable collections, invoice finance and invoice factoring.
Outsourcing debt collection
If your business has invoices that have not been paid on time, you can call and email these customers in the attempt to get paid what you are owed. The problem for many SMEs is that they don’t have the time and resources to get this done. This is especially true for sole traders who are working more than full time, trying to do the work while managing the business. You might not have accounting services in house, so you have to manage it yourself, or outsource this function. It also can be awkward for a business owner to call clients and ask about their outstanding invoices.
Debt collection agencies are one type of accounts receivable outsourcing firm. They offer accounts receivable management services to collect money owed on outstanding invoices. As part of the debt collection process, they can email or phone the business that owes money. If the business doesn’t respond, the debt collection agency might take legal action. Many of these agencies have solicitors on staff who fulfil this service. Others outsource legal services as part of the debt collection process.
One of the main shortcomings of using debt collection services is the cost. Many of these agencies have sliding scales based on the value of the invoice amount collected, with higher percentage commission charges on lower invoice amounts. For example, they might charge you a 30 per cent commission if they are successful in collecting an invoice worth $1,000 and 10 per cent if they are successful collecting an invoice worth $50,000. This is because it can take us much time to collect a small invoice as a large one. So if your business has invoices for small amounts, your collection expense will be higher in proportion to the debt.
Invoice finance and invoice factoring
Other accounts receivable outsourcing companies offer services known as invoice finance and invoice factoring. With invoice finance you can get money early for your outstanding invoices. In effect, the invoices act as security for a loan. The invoice finance company will advance a percentage of the value of the invoices (usually between 80 and 95 per cent). When the invoices are paid, you receive the balance less any interest and fees.
Invoice factoring is similar to invoice finance but with invoice factoring, the lender takes over the collection function and will follow up with customers about late payments. This is more common for small businesses that don’t have a collections department.
Either way, invoice finance and invoice factoring can be expensive. In addition to the interest that’s charged while the invoices are outstanding, there are other fees, such as establishment and due diligence fees. To learn more, check out How Much Does Invoice Finance Cost?
An innovation in accounts receivable solutions
Moula Pay was developed to help with the cash flow challenges of business-to-business transactions. It’s a smarter way to offer payment terms to business customers. When your customers pay you with Moula Pay, you get paid upfront and don’t have to deal with the hassles of offering payment terms and following up when invoices are overdue. In effect, Moula Pay is a way for a business to outsource their accounts receivable function.
Your customers also benefit from great payment terms. They get up to 12 months to pay, with the first three months interest and repayment-free.
Learn more about how you can get paid upfront by becoming a Merchant today.