What Is Accounts Receivable (AR) Automation?

Maintaining a company’s financial health involves monitoring payments for delivered products. Tracking accounts receivable (AR) allows firms to collect money in time and ensure that there will be enough cash to cover current expenses. Building a sustainable business necessitates processing invoices and getting payments. When performed manually, such operations are extremely time-consuming. Firms may need to expand their staff to have enough employees to contact suppliers and finalize payments. Deploying accounts receivable automation systems facilitates tracking and enables enterprises to boost profits by reducing the number of unpaid invoices.

What is Accounts Receivable Automation?

The term refers to a method of expediting tracking of the number of unpaid invoices and collecting payments using dedicated software. Automating the process becomes possible if a company uses pre-programmed tools designed to facilitate financial operations and reduce the time between issuing an invoice and receiving a payment.

According to research, after automating routine tasks, firms reduce the number of days sales outstanding (DSO), which allows them to achieve a consistent cash flow and boost profits. The digitization of manual AR tasks enables businesses to perform the following tasks:

• Get high-accuracy information about finances;
• Generate invoices;
• Send reminders via email automatically;
• Integrate multiple methods of payment.

The traditional AR processes are quite convoluted, which often results in human mistakes. Deploying invoicing software, automated reminders, and other tools businesses eliminate errors, reduce workload, and streamline operations. It allows employees to fully dedicate themselves to advanced tasks. Due to technological innovations, firms can easily collect the money they are owed by expediting reconciliation.

How AR Automation Works

Each company has a set of unique processes enabling it to achieve operational goals. Streamlining them requires a well-thought-out approach, taking into account their particularities. Accounts receivable management is an effective practice that implies leveraging automation to perform such tasks:

• Invoicing
• Payment collection
• Reconciling

As clients may have different AR requirements, using automated tools facilitates generating invoices in a specific format and expediting data entry. Using specialized software, firms issue invoices with specific terms and accurate customer data. When a client makes a purchase, the information about it gets recorded and stored safely. If they have to pay a bill within 6 months, an invoice will be generated and sent automatically when a payment is due.

Accounts receivable automation systems monitor payments of various types, compare and match invoices to orders, and track other data, such as expired cards. Companies introduce incentives for those who pay early and set fees to punish clients who are always late. All the information is stored in a centralized way, which allows employees to get insights into the status of payments in real time.

Benefits of Accounts Receivable Automation

Businesses strive to increase the efficiency of internal processes to save valuable resources and ensure the stable functioning of all departments when the demand drastically increases. Reducing the number of manual tasks has multiple tangible advantages:

• Expedited cash flow and reduced DSO: Getting payments without delays means that a firm will be able to re-invest funds in its development and cover its current expenses. 62% of firms improve DSO after embracing AR practices.
• Higher accuracy: Eliminating the need to track payments manually ensures that there will be fewer mistakes. Enterprises can generate error-free invoices in accordance with clients’ and suppliers’ requirements.
• Increased satisfaction: By issuing invoices without delays and sending reminders, enterprises help clients avoid late fees and finalize transactions on time.

One of the most noticeable benefits of accounts receivable automation systems is that they enable companies to streamline operations and avoid wasting money on excessive amounts of paperwork. Utilizing a convenient dashboard with advanced reporting tools lets employees access data about the payment status, categorize unpaid receivables, and track open ones.

By integrating accounts receivable automation systems, businesses gain clients’ trust and avoid disputes. Besides, dedicated programs foster regulatory compliance by keeping track of current laws.

Customizing AR Automation for Different Industries

There is no one-fits-all approach when it comes to invoice management. Every company should utilize software tailored to its needs to get an edge over competitors. In manufacturing, the slow adoption of digital technologies means businesses that implement custom solutions, allowing them to automate the A/R process, get a strategic advantage. Identifying the processes that bog down the progress of a firm is a crucial stage of enterprise resource planning (ERP).

In the manufacturing industry, companies should focus on improving cash flow and avoid delays in invoice processing. A fast invoice-to-cash (I2C) process means increased working capital, which can be invested in production or sustainable technologies. Custom AR solutions should integrate with existing systems. Choosing a scalable solution will allow an enterprise to avoid costly upgrades.

In the transportation industry, companies should reduce time spent on manual cash applications and re-direct cash flows to ERP. Building a centralized system collecting information about customer interactions facilitates monitoring.

In logistics, using custom tools to forecast issues fosters strategic planning. Firms may also need to develop a web-based service allowing customers to access and pay outstanding invoices using their preferred payment solutions.

Many food and beverage businesses have to deal with tight profit margins and function on credit terms. Using custom accounts receivable automation software with inventory management tools, they can reduce DCO and boost profits. They should also choose solutions that allow them to analyze behavior and detect possible issues. AR balance tracking tools facilitate tracking and enable firms to change credit terms or stop serving customers who break an agreement.

Best Practices for AR Automation

Making a credit-to-cash cycle shorter involves implementing time-tested approaches to increase the digitization of internal processes. Below, we have outlined the most efficient methods of expediting cash collection.

• Automated invoicing and payment processing: Such systems facilitate receiving the funds owed to a business. Using specialized software, firms generate invoices automatically and deliver them via email without delays. Custom programs are based on algorithms that estimate whether VAT or sales tax should be applied and calculate a tax rate. Companies speed up the AR process by enabling customers to set auto-recurring payments and use the most suitable options, including ACH and P2P.
• Utilizing analytics tools: Identifying customer behaviors and tracking key performance metrics gets easier with AR software. Discontinuing cooperation with suppliers who are often late reduces risks and improves cash flows. AR tools are designed to process large volumes of data and detect areas for improvement.
• Integrating AR programs with CRM and accounting software: When implementing solutions built to streamline a payment reconciliation process, companies should focus on their compatibility with existing systems. Choosing advanced tools designed to be used with popular software facilitates saving costs and reducing the time between issuing an invoice and receiving funds.

In addition, enterprises benefit from integrating accounts receivable automation systems with communication tools preferred by their clients and suppliers. Such solutions generate emails and text reminders automatically.

Overcoming Common Challenges

Streamlining accounts receivable collection requires dealing with widespread issues hindering the adoption of new technologies. Discovering the areas where potential problems may arise facilitates achieving stable growth.

• Integration with legacy systems: Working with a new tech stack may be resource-consuming. Implementing advanced tools without any prior experience takes a lot of time and may lead to unexpected issues. The most reliable tools support integration with billing and receivables programs, which enables firms to automatically synchronize invoices and payments.
• Privacy issues: When shortening a credit-to-cash cycle, businesses should consider data security problems that may arise. Adding an extra protection layer enables firms to configure access rights and ensure that sensitive data won’t be compromised.
• Client pushback: Many customers are reluctant to utilize AR automation tools, so it may be better to introduce such solutions gradually. Besides, expedited adoption may be stressful for AR teams. When customers and staff members have some time to adapt to new software, it will be easier for them to master its functionality.

Most issues hindering the adoption can be solved if an enterprise introduces preemptive measures and maintains a professional approach. Using accounts payable software is of paramount importance to firms that want to meet their obligations in full.

Employees can convince clients to meet their obligations when contacting customers via phone and explaining the importance of paying invoices on time. Sending reminders via email helps customers to avoid late fees.

Monitoring and Optimizing AR Automation

Cash application involves matching payments to outstanding invoices, allowing firms to track capital. Centralized dashboards with in-built analytics tools make tracking easier. Using key performance indicators (KPIs) to analyze the effectiveness of AR software facilitates the analysis of progress. The most widely used KPIs include the following:

• DSO
• Aging of AR
• Collection effectiveness index
• Credit risks
• Cost of financial operations (CFOs)
• Bad debt ratio

Reducing DSO by changing credit terms enables firms to make a Cash Conversion Cycle (CCC) shorter. Besides generating e-invoices in accordance with client’s requirements and delivering them automatically, companies can establish credit scoring systems to speed up settling an invoice.

Tracking CFOs facilitates minimizing funds spent on finance organizations. Modern companies should aim at a value of up to 0.6%. As most firms with performance issues spend at least 2% of their profits on finance, introducing the best A/R practices may give them an edge.

Tracking the key metrics enables AR teams to make informed decisions and get a full picture of all the processes. The employees should be able to see information about open disputes, overdue invoices, and due dates to maintain meaningful communication with customers.

Conclusion

By adopting the best communication practices and maintaining a professional approach when discussing terms with customers, enterprises improve cash flow. Automated programs generate invoices, send emails, store information about voice calls, and facilitate reconciling.

Deploying accounts receivable automation software helps businesses identify issues with late transactions and modify credit terms to improve compliance. Firms can access dedicated tools via a dashboard and analyze information about unpaid invoices. BooksTime helps companies to evaluate the efficiency of AR processes and identify possible problems. Book a consultation with our team of professionals today and get insights into the financial health of your business.