Maximize ROI: 10 Proven Accounts Receivable Strategies

Motasim Zawawi

Jul 18, 2023


As every seasoned business owner would concur, maintaining a robust accounts receivable (AR) department is a cornerstone for the vitality of any enterprise. It's as clear as day: you need to gather what's owed to keep your ship sailing smoothly.

So, how can you give your accounts receivable the boost it needs to elevate your ROI (return on investment)?

Strap in as we navigate through tactics to optimize your AR and make your ROI go through the roof.

What's the goal of accounts receivable?

Cash reigns supreme in the world of commerce. Hence, accounts receivable is an indispensable jigsaw piece that ensures the prompt arrival of money due to companies. It’s crystal clear why you need a plan of action to optimize your AR.

So, what are the main objectives of AR?

In essence, they revolve around three pivotal points: boosting cash flow, lowering bad debt, and keeping customers pleased.

Revving up cash flow is the lifeblood that sustains businesses and provides the resources to fulfil their commitments.

Reducing bad debt, in contrast, protects businesses from write-offs, maintaining a healthy bottom line.

Then comes customer satisfaction, the bedrock of repeat business and positive buzz. In simpler terms, satisfied customers are more inclined to settle their dues on time and less likely to default. By hitting these three targets, you can keep your AR department running like a well-tuned machine.

What's the golden KPI for accounts receivable?

This isn't a one-size-fits-all situation. The top KPI (key performance indicator) for AR will differ based on the unique business and its significance. But there are a few noteworthy metrics in the AR sphere:

Days sales outstanding

A prevalent metric is days sales outstanding (DSO), which gauges the average duration for customers to pay their invoices. Keeping tabs on this can provide insights into the pace of customer payments.

Accounts receivable turnover

Another vital metric is the AR turnover rate, which computes the frequency of your AR balance turnover within a set timeframe. It can be a strong indicator of your AR collection process's efficiency.

Bad debt expense

Bad debt expense is the sum that you've written off as uncollectible debt. A hefty bad debt expense implies losing money on delinquent accounts, making it imperative to keep this figure as low as possible.

In the end, the top KPIs for your AR will vary based on your specific business and what holds importance to you. However, monitoring metrics like DSO and ART can give you a clear picture of your AR health.

10 AR optimization goals to hit

AR is one of the most crucial and intricate facets of any business. It's a delicate balancing act of collecting payments swiftly and providing top-notch customer service.

Here are 10 AR optimization goals to set your sights on:

  1. Always know how much your customers owe you. It sounds obvious, but having a precise snapshot of your AR at all times is key. This data will guide your decisions about pursuing late payments and setting fair payment terms for both parties.

  2. Cut down on overdue invoices. This is an essential goal for AR. The less money that's pending, the better your flow will be. You can achieve this by sending reminders when an invoice is overdue.

  3. Provide multiple payment options. Different customers have different payment preferences, from credit cards to checks or bank transfers. Offering more options can encourage timely payments.

  4. Set up a clear payment policy. Customers should know when to pay their invoices and the implications of late payments. This clarity can help them budget accordingly and steer clear of misunderstandings.

  5. Stay on top of collections. This involves tracking which customers owe you money and following up with them regularly until they settle their debts.

  6. Keep precise records. This entails invoices, payment history, and each customer's contact information. This record-keeping is crucial if you need to collect or take legal action against a customer who refuses to pay.

  7. Streamline your invoicing process. The easier it is for customers to understand their invoices, the likelier they are to pay on time. So, ensure your invoices are legible and free of hidden charges or unreadable fine print.

  8. Extend payment terms only when needed. At times, you might have to extend payment terms to keep a customer content. But do this sparingly, as it can disrupt your cash flow. Offer early payment discounts. Many businesses give a discount (e.g., 2%) to customers who pay their invoices within ten days. This tactic can incentivize timely payments and boost your cash flow.

  9. Hire a professional collections agency. If all else fails, you might need to enlist a professional AR collections agency to recoup some of your losses. Consider this a last resort, as it can strain customer relationships and tarnish your business's reputation.

Keep the above in mind when considering strategies to optimize your AR.

What are the top three strategies for collections?

There's more to AR collection than reaching out to debtors and crossing your fingers for payment. You need to deploy some key strategies to maximize your chances of getting paid.

Here are three top strategies for collections: communication, automation, and timeliness.

First, it’s paramount to lay down clear communication lines with clients from the get-go. Be forthright about your payment policies and ensure that clients understand their financial duty.

Next, it’s crucial to have an automated system in place for tracking payments. If you want to spot which customers are lagging in their payments quickly and easily, an automated system can enable you to act accordingly.

Finally, it’s vital to follow up with clients promptly. If a payment is late, don’t hold back from reminding the client about their outstanding balance.

By adhering to these simple steps, you can help keep your AR in shipshape and manageable.