Accounts receivable, also known as AR, is the department that handles payments from customers for goods or services provided on credit. Whether it is a healthcare facility, utility company, or other service-related business, collecting payments on time is critical for healthy business operations. Inefficient accounts receivable management could lead to several problems, including customer relationships suffering, financial strain, and increased administrative costs.
Customer Relationships Suffer
Accounts receivable management is crucial for maintaining solid customer-provider relationships. Not being able to collect payments efficiently could stem, at least in part, from poor communication, especially between the company and the customers. If that happens, customers could begin to distrust your business. If customers lose trust in your business, it could result in a potential loss of customers.
Poor Communication
When it comes to accounts receivable management, communication is what makes payment processes flow better. Whether it is offering a payment plan to a customer who is facing financial hardship or merely informing an unknowing customer who might not realize that their bill has become delinquent, communication is critical in maintaining good customer relationships and in providing efficient accounts receivable management. When communication breaks down, inefficiencies in AR could become a detriment to your business because opportunities to collect past due accounts are diminished.
Potential loss of customers
Furthermore, poor management of accounts receivable could result in a loss of customers. Loyal customers may lose trust in your business if they experience poor communication, customer service, and especially in the event that payments are mishandled, not recorded properly, or erroneously documented. If customers never receive a bill, or it is sent after a lengthy delay, the customer may not be willing to pay the surprise bill—and they may be likely to find a new provider when presented with the bill, which could leave your business at a loss of both that revenue and any future business. A potential loss of customers is a consequence of inefficient management of accounts receivable.
Financial Strain
Financial strain is another consequence of inefficient management of accounts receivable. Uncollectable accounts could result in missed revenue. A high volume of unpaid invoices could also lead to a higher risk of defaults, especially if cash flow is interrupted or bed debt accrues. Inefficient accounts receivable management could have a significant negative impact on businesses, potentially leading to a negative impact to overall profits.
Interrupted Cash Flow
When bills aren’t sent out in a timely fashion, uncollected accounts could go unpaid, and the number of uncollectable accounts could compound. All of these issues could result in an interruption of cash flow needed to keep operations running. When thinking about what is a consequence of inefficient accounts receivable management, interrupted cash flow could be one of the most devastating. Inadequate or poor management from AR could have a negative impact on daily operations, especially if cash isn’t available to pay for things like overhead costs, payroll, and more. Efficient accounts receivable management is a necessary function of a healthy business.
Bad Debt
Poor financial management correlates with the likelihood of accruing significant bad debt. When payments are not collected, overdue accounts could mount. This bad debt could then put the company at a higher risk of default, not to mention the negative impact that it can have on profitability. Having an efficient AR team available to collect payments in a timely manner can help mitigate this from happening.
Increased Administrative Costs
If your company suffers from inefficient accounts receivable management, you’ll likely also see an uptick in administrative costs. You’ll need to dedicate resources to managing overdue accounts, including tracking them down and attempting to collect payment. Additionally, you may have to increase customer service staff to quell upset customers and manage communications. Ultimately, inefficient accounts receivable management will result in wasted resources.
Wasted Resources
Instead of logging payments and balancing budgets, your staff could end up spending their time on tasks that would not be needed if accounts receivables were properly managed. Increased administrative costs stemming from poor management or simply inefficient accounts receivable management could ultimately lead to wasted resources, financially and with regard to your personnel. The personnel and staffing resources that could be going to operational efforts could end up being delegated to tracking down payments and dealing with upset customers.
Need to Add Staff or Purchase Technological Systems
In some situations, it’s just not possible to handle the shortcomings of inefficient accounts receivable; you may find that you need to add staff or invest in technological systems to stay above water. This could mean a costly investment in resources like new accounting software, staff to manage the software, and staff to handle thea accounts. If your business is experiencing low collection rates, that could result in a situation where your business is throwing good money after bad. Inefficient accounts receivable management could potentially cost your business significant revenue, and the added cost of additional staff or technological systems could further put your business in a precarious financial situation.
Don’t Ask What is a Consequence of Inefficient Management of Accounts Receivable, Avoid it!
If you’re in a situation where your business may be suffering from poor management of accounts receivable, or you simply have inefficient accounts receivable management, it’s time to get help. Contact Credence Global Solutions to get help strategizing a better way to manage your AR and get your company paid.
