Key Takeaways

Receivables management is the process of optimizing credit arrangements with customers
Effective credit policies can significantly improve customer satisfaction and sales
Poor receivables management can severely impact cash flow and increase losses
Best practices require clear policies, excellent communication, and rigorous systems

A good sign of sound financial health for any company is having robust receivables management in place. Here we offer tips on how to stay on top of your receivables.

What is Receivables Management?

In simple terms, receivables management is the handling of unpaid debts owed by customers who have been extended credit (See Investopedia). Receivables are monies legally owed for goods or services sold that have not yet been received. They are treated as an asset (e.g., according to GAAP or China Accounting Standards) but must be carefully managed to ensure benefits are maximized, and potential risks are minimized.

The key components of receivables management are:

Credit assessment: Before extending credit and allowing receivables to accumulate, a customer should be assessed to determine their ability and intent to pay. Checks should be made before the credit is granted and continued throughout the lifetime of the debt. A business should also assess its own ability to extend credit without causing cash flow issues.
Clear terms: When credit is offered, it is essential to outline and agree on clear terms.

This could include schedules, deadlines, limits, interest, and any incentives for early payment or consequences of late payment. This minimizes the risk of issues while strengthening the business’ position should disputes arise.

Tracking: A vital element of receivables management is ensuring all monies owed are recorded and tracked. This not only prevents debts from being forgotten or disputed but also allows receivables to be properly factored into financial assessments, projections, and any other accounting. Accounting automation can help with this.

Collection: It is important to have clear processes to encourage prompt payments and plans for when this does not happen. Recovering debts can be costly and time-consuming. The potential for these expenses and plans to minimize them should be factored into any receivables management system.

Making sales is the key goal of any business. If extending credit to customers helps this, it is a tool that should always be considered. However, a business is exposed whenever a gap exists between sales and payments, making effective receivables management vital.

What Are the Benefits of Effective Receivables Management?

Implementing clear receivables management processes makes it easy for a business to understand what it is owed, when it will be received, and where blockages exist or might later occur. This creates a clear picture of cash flow, allowing better decisions and minimizing risk. It also provides the information required to help remove blockages and prevent bad debts. Without effective receivables management, the risk of losses due to unpaid credit becomes significantly higher and harder to reduce.

Other benefits of effective receivables management include better customer service through the extension of realistic credit with transparent terms. It can also encourage increased sales by removing barriers to purchase while still protecting the business.

What Are Some Challenges in Receivables Management?

As with any essential business process, receivables management is a complex task that comes with a series of challenges. Some of the most common issues and their solutions include:

Late payments: Failure to receive payments on time is the most common disruptor for receivables management. This can occur due to misunderstanding, oversight, financial difficulty of the debtor, or even with deliberate intent.

Clear terms and regular communication are key to reducing misunderstandings and allowing issues to be promptly resolved. Incentives to pay early and established consequences of non-payment reduce the potential for deliberate delay. In addition, making payment easy by offering a choice of convenient methods and self-service options is one of the simplest ways to remove barriers to timely settlement.

Poor record keeping: The quickest way for any business to get into trouble regarding its accounts receivables is poor record keeping. Not only does it make recovery more difficult, it makes it impossible to understand the financial situation of your business.

Diligent ledger keeping, dedicated departments, and outsourcing are all options for ensuring receivables are properly tracked. Efficiency can also be improved using modern software and IT systems to automate much of this task.

Maintaining relationships: Fostering strong relationships with customers is essential for any business. Offering credit can be a great way to enhance this, but managing it poorly risks damaging relationships and, by extension, the company’s reputation.

Communication and clarity are vital for maintaining relationships throughout any credit arrangement. A balance of understanding and assertiveness is needed to protect a business in the short term while encouraging continued long-term custom.

Improving business liquidity: Effective receivables management is a balancing act between maximizing sales and keeping a healthy cash flow. Success is measured in Days Sales Outstanding (DSO), the average number of days taken to collect payment for a sale. The smaller that figure, the more liquid the business is (See Wall Street Prep).

DSO statistics offer early warning signs. Unexpected rises indicate poor management, lack of customer satisfaction, and potential cash flow issues. Monitoring and understanding DSO allows businesses to act before it’s too late.

Challenge	Business Impact	Recommended Solution
Late Payments	Cash flow disruptions and higher financing needs	Clear credit terms, early payment incentives, automated reminders
Poor Record Keeping	Inaccurate financial reporting and lost receivables	Accounting automation, cloud-based ledgers, standardized documentation
Customer Disputes	Delayed collections and damaged relationships	Transparent invoicing, detailed contracts, structured dispute workflows
High DSO	Reduced liquidity and increased working capital strain	Stricter credit approval, regular DSO monitoring, payment method optimization
Limited Internal Resources	Inconsistent collection processes and inefficiencies	Dedicated AR teams or outsourcing to receivables specialists

Best Practices for Receivables Management

Steps that should be taken to ensure best practices in receivables management include:

Establishing a clear credit policy.
Assessing risk before agreeing on any credit.
Offering incentives for early payment.
Making payment easy for everyone.
Communicating constantly.
Establishing standard processes for late payments and disputes – and sticking to them.
Keeping meticulous records and tracking data consistently.
Regularly reviewing and adapting all processes.

Some tools to achieve these include:

Dedicated departments and well-trained staff.
Specialized software and IT systems.
Automated tracking and payments.
Outsourcing to receivables management experts.

Stay on Top of Receivables

MSA supports businesses in China and around the world to ensure that they have a functional accounting system in place. Both for business efficiency, and to ensure that the business is compliant with accounting standards. To learn more about how MSA can help you, get in touch with our accounting experts.

Tightening credit terms with key customers and implementing collection procedures early prevents working capital crises, particularly in sectors with long payment cycles and supplier dependencies. Accounting in China teams at MSA Asia help design receivables management processes that preserve cash flow. Speak with our advisors about improving receivables collection.