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Why Outsource Accounts Receivable? 5 Benefits That Can’t Be Ignored.

November 9, 2023

By quatrro

Outsource Accounts

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In today's rapidly evolving business landscape, companies of all sizes and scope must overcome myriad challenges to efficiency and growth. Amid this complexity, stakeholders often struggle to maintain seamless accounts receivable processes while simultaneously focusing on their core operations.

Faced with these demands, outsourcing the accounts receivable, or order to cash (O2C) process, frequently emerges as an invaluable solution. By entrusting this vital accounting function to external experts, organizations can streamline their financial operations, enhance cash flow management, and gain valuable insights into their revenue cycles.

What Is Accounts Receivable?

The accounts receivable, or AR or O2C, function is fundamental to an entity's financial management, as it’s responsible for tracking and collecting all monies for goods or services that have been delivered but are yet to be paid.

An accounts receivable workflow typically encompasses:

  • Customer Credit Approval: Before extending credit to customers, a business should establish clear credit policies and procedures, including a robust method of assessing customers' creditworthiness to minimize the risk of non-payment.

  • Invoicing: Once a product or service is delivered, invoices listing the amount due, payment terms, due date, and any other relevant details are issued to customers via mail, email, or automated invoicing systems.

  • Aging Analysis: To prioritize collection efforts, the AR team maintains an aging schedule that categorizes outstanding invoices by age, including current (0-30 days), 1-30 days overdue, 31-60 days overdue, and so on.

  • Payment Receipt: As customers remit payments through various methods (checks, bank transfers, credit card payments, etc.), they must be recorded in the accounting system and applied to the appropriate invoices.

  • Follow-Up and Collections: If a customer does not pay by the due date, a process should be in place to send reminders and inquire about the payment status. Organizations should also establish a policy for managing increasingly delinquent accounts, including the potential involvement of collection agencies or legal action.

  • Reconciliation: Regularly reconciling accounts receivable records with customer statements and financial reports helps ensure the accuracy of the accounts and identifies discrepancies.

  • Bad Debt Provisions and Write-Offs: In cases where it becomes clear that a customer will not pay, a company may need to make provisions for bad debts. This involves recognizing the expected loss as a write-off expense in the financial statements.

  • Reporting and Analysis: Data generated through the accounts receivable process is used to produce reports and analyze the efficiency of collection efforts, aging schedules, and cash flow projections.

Advantages of Outsourced AR

Improving even a medium-sized organization's accounts receivable function requires a substantial investment of time and resources, and given the uncertain state of the national and global economy, a risk many CFOs and CEOs are unwilling to take. In this environment, outsourcing AR offers one of the most viable and effective strategies for reducing Day Sales Outstanding (DSO) metrics and securing payments sooner. AR service providers have the tools, skills, and technologies to revamp an existing AR workflow and provide new capabilities to streamline the entire billing and collections process.

While the advantages of outsourcing AR are numerous, the most significant benefits include:

Faster Payments

Maintaining friendly and consistent contact with customers can ensure a company's invoices are always prioritized for payment, but all too often, internal AR departments lack the capacity to do more than issue invoices and automated payment reminders.

This is where accounts receivables outsourcing proves invaluable, as providers can ensure persistent contact with overdue customers to expedite payments. Their AR professionals possess the expertise and the resources to manage late-paying customers with the delicacy these vital relationships demand. Sustained communication with customers contributes to a better grasp of a company's billing and payment procedures, ultimately increasing the likelihood that future payments will be remitted on time.

Access AR Best Practices

There isn't a one-size-fits-all AR workflow to meet the needs of every organization, but there are accounts receivable best practices that, when tailored to a company's size and industry, can boost working capital. A professional AR partner can pinpoint disparities between the accounts receivable workflow and industry norms, providing leadership teams with the insights necessary for informed decision-making.

  • Provide impartial evaluation of current AR procedures, such as the frequency of deviations from standard contract terms

  • Improve the reconciliation frequency of discrepancies in accounts

  • Develop financial reports for evaluating future revenue and liquidity

  • Improve the precision of customer credit policies; this entails examining the speed of credit application approvals, the adequacy of customer risk assessments, and the necessity of modifying established credit policies

Streamline Invoicing Through Automation

While it might seem straightforward, the invoicing process is susceptible to errors and discrepancies that can impact a company's cash flow. Fortunately, issues like delayed invoicing generation, inaccuracies in customer data recording, and off-system billing can be effectively resolved by centralizing AR and implementing automation through electronic billing systems and customer portals.

Outsourcing accounts receivable operations grants organizations access to the latest automation advancements without requiring direct investments. Through automation, the silos separating various business units can be dismantled, fostering greater transparency in financial reporting and empowering leadership to make more timely and better-informed decisions.

Lower Internal Costs

Outsourcing AR reduces and can even eliminate the need for in-house teams, lowering payroll and benefits expenses while enhancing cash inflow. Outsourcing also allows an organization to seamlessly expand AR collections processes as the business grows while avoiding the increased overhead costs and added concern of recruiting and training additional staff to meet the growing demand.

Targeted Approach to DSO

Outsourcing accounts receivable offers an opportunity to negotiate a reduction of 10, 20, or even 30+ days in a company’s DSO as a defined business objective within the contract with the service provider, which ultimately translates into more cash available for core business functions.

While the advantages of AR outsourcing are compelling, they must be assessed alongside the associated risks, including the risk of entrusting such a critical financial function to a third party, which directly impacts a company's cash flow. The potential for privacy data breaches must also be considered. These and other pitfalls can be mitigated by collaborating with a top-tier, seasoned outsourcing partner capable of providing a combination of AR technology, expertise, qualifications, and experience that perfectly aligns with your company's specific objectives.

Outsource with Quatrro and Get More to Go On

If you're looking for an outsourcing partner with the expertise to optimize your account receivable workflow for greater efficiency and growth, Quatrro is ready to assist. To learn how our AR professionals can help your business get more to go on, reach out to us today.

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