Why Smart Businesses Outsource Accounts Receivable (And You Should Too)
Betty owns a design agency in Toronto. Her company landed a major contract with the production company. The company was impressed with her work but had a bad habit of slow payment processing.
She was stuck in a cycle of email reminders and phone calls, but the company kept delaying payments. Meanwhile, Betty’s team became restless, and the bills continued piling up.
We know you must be thinking that’s too frustrating. How can a company do that? Well, there are many things you face when you own a business.
This is where outsourcing accounts receivable can make all the difference. After searching, Betty did outsource accounts receivable to get her payment back, which she got back in two months.
If you are curious to know more about outsourcing accounts receivable, this guide will break down what outsourced accounts receivable are and how they can change the way you do business.
What are Outsourced Accounts Receivable?
Outsourcing accounts receivable, or AR, is hiring a service provider to manage your invoicing and collections if you are an accounting nerd like us. These services handle everything from generating invoices to follow-up and dispute resolutions (like in Betty’s case).
You are partnering with an expert, saving you tons of time and overhead costs, as you don’t need to train your staff to do the invoices. We have a detailed guide on the top outsourced accounting services if you need to outsource more than AR.
For instance, outsourcing accounts receivable can save you 20 days on payment collection. That’s an extra 20 days of cash flow to pay employees, take on new projects, or reinvest in your business. So, it’s not all about getting payments faster.
How Do You Outsource Accounts Receivable?
You seem excited about outsourcing accounts receivable, but it’s not all about finding the top outsourced accounts receivable provider. You are running a business, so you need to plan and consider a few things before hiring an AR.
Know your needs
Before hiring, review your current accounts receivable process and identify any inefficiencies. For instance, Betty sent emails and phoned the production house; however, she didn’t go for dispute resolution. Your business analysis should also consider the volume and frequency of monthly transactions.
After that, you need to determine what aspects of your AR process you need help with. Is it only invoicing, follow-ups, or dispute resolution? This gives you a sense of where the problem is and what services you require.
Select the Right Service Provider
Next, you need to choose the right service provider. That expert should understand your industry, have a proven track record, and be able to identify core issues. For instance, if you own a construction company, Tangent Consulting has years of expertise working with such companies and the payment challenges they face.
Customize the Service
The good thing about outsourcing accounts receivable is that you can only pick providers that can integrate with the current systems. This includes setting payment terms, invoicing schedules, or dispute management.
Manage
You are working with the provider, but you still need to manage. For instance, you need to set clear goals, have regular meetings, and monitor overall progress. In addition, you need to communicate clearly with the service provider about the KPIs and what you expect from them.
Why Smart Businesses Outsource Accounts Receivable?
Smart businesses know that time is the most valuable asset, and outsourcing what you don’t understand or don’t want to do can save you a lot of time and improve a business’s financial health. Here’s why smart businesses outsource accounts receivable:
Faster Payments
We mentioned earlier how receiving faster payments can open the door to several things. But you also need to know about a term called DSO (days sales outstanding).
DSO measures the average number of days a company takes to collect sales payments. The higher the DSO, the more payment delays the company faces, as Betty’s company was experiencing.
If an AR service provider can see a reduction in DSO by 20%, payments will come faster than 20 days. So, that’s how smart businesses grow, as they have free cash flow coming in.
Increased Productivity
Smart businesses are smart because of how they operate. If you don’t outsource and rely on an internal team for invoicing and collections, your team can get bogged down or make errors. When freed up, your team can focus more on growing your business.
For instance, let’s say you own a manufacturing company. After outsourcing accounts receivable, your team can focus on operations and increase production efficiency.
Reduce Bad Debt
We know that financing is important for small businesses. But sometimes, financing becomes so extensive that it becomes a bad debt, and businesses suffer. According to the Federal Reserve Small Business survey, 59% of small businesses face financial problems.
However, you will likely see quick payments when you outsource accounts receivable, reducing the chance of writing off unpaid invoices.
Cost Savings
We understand you’d think, “Oh, Tangent, there’s an upfront cost.” We understand outsourcing costs; however, long-term cost savings are significant.
When you outsource AR, you don’t need to hire additional staff, reduce overhead costs, or minimize late payments. Plus, you will free up cash flow, which brings additional benefits.
Top accounts receivable outsourcing companies like Tangent Consulting (of course, we are going to put our name 😊) bring expertise, which is hard to match if you hire an in-house AR. They know the best practices to ensure timely payments and the legal complexities to resolve disputes.
Final Thoughts
If you want your business to be in the ranks of smart businesses, you need to have an edge over your competitors. By outsourcing accounts receivable, you make a strategic decision that can help you get faster payments, improved cash flow, and long-term cost savings. Plus, don’t get us started on the stress you’ll reduce.
And if you are ready to make your business stand out, we are here to help.
FAQs
Who pays accounts receivable?
Accounts receivables are paid by the company’s clients/customers who own them or products or services. Ideally, you should receive the payment in less than 45 days.
Can accounts receivable be sold?
Selling ARs can provide your business with a quick cash flow. But you’ll need to sell invoices at a lower value.
Is billing AR or AP?
Billing is part of accounts receivable. When you outsource accounts receivable, the service provider handles all your billing needs, like the unpaid balance.
