The Intelligent Accounts Receivable Blog

Manage your accounts receivable portfolio like a pro

Posted by Matt Shapiro on Apr 24, 2019 11:27:17 AM
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Manage Your Accounts Receivable Portfolio Like A

You got it! The Accounts Receivable Management role is yours (or, it’s been yours). Time to get the lay of the land and make improvements where you can. What’s the best way to understand where you are and where you want to go? We are going to help by providing a step by step guide to set you up for success.

Step 1: Define crucial metrics & current statistics

What metrics measure accounts receivable performance and success? What’s important to your executive team and company as a whole? What’s important to you? How is your process currently performing? What’s working? What’s not working? Some answers might be known and obvious and some take a bit of digging and calculations. By thoroughly understanding your current Accounts Receivable process ecosystem, strategic actions can be determined to reach goals. Goals can be set and met with defined success metrics and continuous measurement.

Key metrics are essential for any business success. Some go overboard trying to measure everything. You only need to define metrics that can help you understand the overall accounts receivable department’s performance.

Below are a few standard metrics we see most businesses watching and measuring. Add metrics that are important for your companies business model and contribute to cash flow.

  • Speed of your invoice generation & delivery: How long does it take your company to create and send an invoice after your company completed the service or delivered product.
  • Past due environment: What is your amount of accounts receivable? How many days past due is each account? Get to know your company’s aging accounts picture.
  • Time spent on repetitive tasks: What’s your process for servicing past due accounts and how much time is spent doing them? What percentage of these tasks are repetitive? What’s the cost? Many businesses do not typically measure these metrics as it’s viewed as a part of doing business. These metrics occur unconsciously and go unmeasured. These metrics are invaluable to lower operational costs, improve efficiency, and improve performance.
  • Customer happiness: Are your customers happy? There is a direct correlation between unhappy customers and aging invoices. The happier the customer, the less likely the bill will be paid late or not at all. Managing customer relationship is critical for Accounts Receivable Management performance and high payment rates as more than 53% of late or unpaid invoices occur from unhappy customers.

It’s best to continuously measure these metrics. If some are new, start tracking today to achieve goals. Depending on your company, historical data might be absent or incomplete.

Step 2: Define your Accounts Receivable goals

In Step 1, you have learned your current and historical accounts receivable metrics and performance. Time to set goals. What metrics do you want to increase or decrease? (We’ll cover how you are going to achieve these goals in Step 3 How much do you want to increase or decrease specific metrics?

Set your goals using historical data

It’s likely your data is found in many places including employee desktops on spreadsheets. Gather all data from all software and employees. To leverage historical data, ask the following questions:

  • Does my [your metric here] have seasonality? If it does, then you want to factor this into the equation. For example: One of your customers is a retailer, and you billed them for a product or services completed in November. It’s possible they’re late paying the bill because it’s their busy season. They pay late every year, in January. This input is crucial to consider when you are creating December goals and the action items. Another example might be billing trends. Maybe March is busier than April. What can be done to ensure the necessary cash flow?
  • Is the [your metric here] at the lowest/higher point? Example: Your average past due days last year was at its highest, and you’ve noticed an increase in delinquent accounts. What can be done to reverse this trend? Is it a specific type of customer/market? Has something changed in your accounts receivable process? This information will contribute relevant insight for Step 3.

It’s important to set challenging yet attainable goals. If they are too easy, then your company could be wasting resources; too hard, and it’s demoralizing. Tough, achievable goals help motivate and stimulate teams while ensuring you are getting the most out of your resources.

A common strategy is to start increasing or reducing the metric, depending on desired outcome and metric, by 20% to 30% when setting initial goals. If the days past due average is 68 days, reducing it by 20% will reduce this metric to 54 days. Remember to factor in historical data to adjust goals as needed. For example, take a look at your target and compare it with your lowest in your data, if your lowest was 50, then your goal should be 50 instead of 54. What if your lowest was 30 days? Is this a freak outlier, or is there information to be discovered and leveraged? 

Setting goals from scratch (without historical data)

What can be done if there isn’t historical data or fragmented data? Experience can provide some fundamental guidance; however, talking to executive leadership and other employees will begin to build out a picture of the past. Receiving payments faster and having fewer accounts in delinquent status are obvious metrics to define and measure, but how can they be quantified without historical data? Run reports and start with data available today.

The same 20% and 30% outline can be used here. The same as the previous section of those with historical data.

Don't forget to add time to your goals

What’s your fiscal year? How does your company benchmark growth/sales/revenue? Is it daily, weekly, monthly, quarterly, or annually? Aligning goals with the proper time frames and key dates are essential. We propose building goal projections 1-5 years, then breaking down in greater detail as needed using former questions as guides. Continuously measuring as the days pass will enable you to take action(s) as needed to ensure you are on track to goal achievement. Remember to factor in seasonal factors if they exist.

Additionally, set your own goals as you see fit to help hit new goals set. Meaning, if only quarterly goals are reported and benchmarked by leadership, set weekly or monthly goals to guarantee your own success. This is an opportunity to structure time and metrics for you - for Accounts Receivable Management performance optimization.

One more thing about goals

At this point, your accounts receivable metrics and goals have been defined. Now, what’s going to drive you to achieve these goals? How are you going to start the momentum and keep it growing? We propose looking inward for the next set of questions to help you accomplish goals. Why is it important to accomplish this goal? What do I get if I do this? Why do I want to do this? How will this make me feel and why? Ask your team and leadership these questions, too.

Write down the responses and review them when a difficult day pops up. Be mindful of the language used as this will boost morale and empower you and your team every time they are read. It's more compelling to say, "Achieving these goals will make me an amazing Accounts Receivable Manager and gain the respect of my colleagues. It’s important for me to be the best in my field. I feel happy and valued when my team accomplishes goals” It’s more personal than “I want to be good at my job and increase payment rates.” The objective of the "why column" is for a shot of motivation every time you read it, so make it good and use your own words.

Step 3: Determine action items for your Accounts Receivable Management goals

Create a table with three columns: Goal, Action(s), and Purpose (“why column”). One goal can have more than one action. What action item will be done first? Goal time might play a role in prioritizing action items. Another way, use the 80/20 concept. Do 20% of the actions that will net 80% of the results. Historical data and information gained from employees will also help prioritize. Let your team and leadership contribute to setting action items especially if you have a large team. Having them participate will build morale and fire up motivation. We recommend having one table for each column, example below:


Step 4: Last, review and share it with your team and executive leadership

Transparency and accountability will help you be an A/R superstar! Sharing outcomes discovered by following these steps with your colleagues will let everyone know your goals and why they are important to accomplish. Clarity will help everyone do their part to contribute and they will be able to track progress as well. By everyone working together to hit specific metric(s) increases and decreases, success it at its strongest. 

Consider adding a project management tool to easily organize and track such as Trello, Asana, Notion, and Monday. These are a few of my favorites.

If you have questions, add it to “comments” and we will address all. Thank you!

Topics: accounts receivable, Account receivable Tips