Accounts receivable management is a critical process in any B2B business. The success or failure of this process directly impacts the cash flow and financial health of the business.
Despite this, many small and medium B2B enterprises struggle with their receivables.
This is especially true when you have a small team with a growing business. With every new customer, there is extra workload that gets added to your AR team.
With an increased chance of errors, broken communication processes, and fragmented payment and collection systems, delayed payments and piling up of accounts receivables can start to create a challenge.
Can outsourcing be the answer to this problem? What are the potential benefits of outsourcing? Can you trust a third party to take care of your receivables process? Are there any downsides to outsourcing?
Let's find out.
Role and responsibilities of an accounts receivable team
Before you think about outsourcing, it can help to reflect on the core responsibilities of your accounts receivables team. The number of people on the team and the things they do will depend on the stage of your business growth and the number of customers you have.
Broadly, there are three main responsibilities of the AR function in an organization:
- Invoice management to process and keep a track of unpaid invoices
- Customer communication for follow-ups and payment collections
- Invoice reconciliations and payment credit adjustments on a case-to-case basis
In small business organizations, the in-house AR team can also do credit checks to determine risk and creditworthiness.
3 core reasons for accounts receivable outsourcing
One of the biggest challenges of accounts receivables management is that it is not scalable with business growth.
As the number of customers increases, the chances of wrong invoices, infrequent follow-ups, and late payments also go up. There is also a risk of fragmented and isolated workflows without a proper financial reporting policy in place.
You can increase your sales but if you are not able to collect payments on pending invoices, what’s the point? Worse, it can lead to bad debt accumulation and a shortage of working capital.
So, there are 3 main reasons why you must consider outsourcing accounts receivable collections:
1. Streamlined processes
Outsourcing is the best way to streamline critical processes in receivables management. This can include invoice automation, better collections strategy, and personalized communications with customers for reminders.
Outsourcing firms have the strategic and technical know-how to use the best tools and practices to streamline the accounts receivable process. It saves your time and the cost of hiring an extra workforce to meet your requirements with the growing business.
Streamlining also helps to integrate different systems like invoicing, payment, and collections to prevent any reconciliation errors and confusion among customers.
2. Access to advanced technology & financial expertise
Another reason to outsource account receivables is to gain access to technology and dedicated expertise for accounts receivables management. When you have a small team, it might not be possible to invest in expensive AR collection software or hire a specialized team.
This is where outsourcing can help you implement automated workflows in your AR process.
The receivables experts already have access to such tools and can even use their own licensed versions. This helps you cut down the cost of investing in new technology while still being able to enjoy the benefits of AR automation.
Additionally, their financial expertise can help you identify gaps in your process by conducting an impartial assessment of your workflow. This helps you set robust foundations at the beginning itself and prepares you for success and expansion in the future.
3. Increase in efficiency and productivity
When you are a growing B2B business, there are tons of things demanding the attention of your team.
Chasing clients, closing deals, building a team, dealing with suppliers, and strategizing for future business growth are a few of the pressing areas of concern. In the middle of this, you need to ensure your team is lean and efficient.
Following up with customers for payments and keeping a track of unpaid invoices can demand a significant time that can be utilized to optimize the core business.
So, outsourcing this function can boost the productivity of your team. They can focus on more important initiatives instead of tedious follow-ups. It also helps you get paid faster which leads to an increase in working capital. In this way, you can invest in new initiatives for business expansion without overloading your core team.
Benefits of outsourcing accounts receivable
1. Improved invoice management efficiency & quality
Manual invoicing and paper-based invoices are the biggest reasons behind late payments. Not only do they take a lot of time to prepare but they are also more prone to human errors as your customer base and number of invoices grows.
If a customer has any objection or needs any rectification in the invoice, it could take days or even weeks for your internal team to respond and make corrections!
Experts in accounts receivable management can digitize and automate your entire invoicing and billing process. They can make it easier for your customers to send edit requests, make digital B2B payments with multiple options, and also reconcile invoices with their accounts payable.
It not only improves the efficiency of your bookkeeping but also leads to a superior customer experience.
2. Cost savings
The biggest advantage of outsourcing accounts receivable is the cost savings associated. You no longer have to worry about expanding your AR team and training them as your business grows.
Outsourcing enables you to have a scalable staffing approach that grows with your business while reducing the overhead of administrative costs related to hiring and training a new team. You also save on investing in new technology and automation solutions as your outsourced AR partners can support you.
Depending on the stage and lifecycle of your business, cost savings from outsourcing can become critical.This leads to better working capital to meet operational expenses and maintain business agility and liquidity in the event of uncertain scenarios.
3. Improved credit risk management
Extending credit is a double-edged sword in B2B business.
Customers love doing business with companies who can give them their desired B2B payment terms. So, when you are growing, it becomes tempting to issue credit just to close a deal.
However, this also comes with the risk of bad debt. Without proper business credit checks and B2B credit risk management, you can even issue credit to otherwise high-risk customers who you may not lend extend credit to before.
Outsourcing to an expert AR team on tap (like Resolve!) can help you avoid this risk. Their financial experts can conduct thorough business credit checks so that you don’t need to learn how to read Experian business credit reports.
An outsourced AR team also analyze the customer data of your buyer’s payment history and revise payment terms, if needed. So, you can actually extend more credit to those who showcase an excellent payment record for business growth. And if a customer is frequently late in making payments, you can restrict the credit extended to maintain stronger cash flow.
4. Integrated billing and collection systems
An outsourcing partner can also help you break down or prevent siloes that may come up in the finance and accounting departments of your organization. This is especially helpful when your business begins to grow and you need a unified view of your invoices and collections.
Accounts receivable experts can also help you integrate your billing, receivables, and AR collection systems. This can speed up your B2B collection process with timely follow-ups and payment reminders.
This integration also gives you clearer visibility into unpaid invoices and cash flow in real time. Depending on your outsourcing provider, you might be able to prepare comprehensive financial reports to help you understand your customer credit and payment history. In this way, you can make smarter business decisions about how you extend credit to in the future.
5. Reduce DSO & increase cash flow
Running a more efficient accounts receivable process can have a big impact on cash flow. When done right, you get paid faster and leads to a reduction in your DSO (Days Sales Outstanding).
But, you might not have enough resources on your credit team to conduct proper credit checks and perform timely follow-up to ensure all your payments are received on time.
That’s why accounts receivable outsourcing services can take care of this! With streamlined communication and a professional approach to collecting payments, an “AR team on tap” can bring down your DSO much faster than any standalone technology solution or a single team member. The potential boost in your working capital would also be a tremendous benefit.
6. Improved business agility and performance
Last but not the least, any outsourcing company you use enables you to focus on long-term business growth as you and your team can now move from tactical task related work to strategic decision making and planning. Imagine this: you no longer need to spend hours chasing customers for late payments. Instead, imagine focusing on bringing in more customers and closing more deals to help you achieve economies of scale in your business.
By using an outsourced team to help you, you can actually keep your business running in the event of an emergency or another black swan event, like a pandemic. This decision can also mitigate your risk of overhiring as you can you maintain a leaner team that is more agile and dynamic.
What are the cons of outsourcing accounts receivable?
Outsourcing your receivables doesn't come without its share of concerns and risks. Here are some factors you must keep in mind before outsourcing your AR process:
1. Lack of control
When outsourcing AR, keep in mind that you are relying on a third party to manage a critical aspect of your business process.
This means a considerable loss of control over your financial process. Plus, any negative action by them can impact your reputation among your customers.
Keep this in mind when you choose an AR partner. Select an outsourced AR partner who is trustworthy, professional, and reliable. Ask for case studies and proof of their credibility and experience. Additionally, remember to check their work and reviews their performance on a regular basis to ensure they are not damaging your reputation with your customers.
One example of a company that managed to outsource their AR and incur a positive benefit is Tern Bicycles. They used Resolve to manage their net terms and manage their accounts receivable while navigating supply chain shortages. Not only did they manage to save on the cost of hiring one full time team member, Resolve also helped them grow their average order size by 30%.
2. Security and customer privacy concerns
The biggest risk with outsourcing your accounts receivable is the risk of data theft and leak of your confidential financial information. This is always a risk when you turn over your financial data to a third party. This can not only lead to loss of trust from your buyers - but also can result in legal ramifications for your business.
This is why it’s crucial to choose a reputable AR partner to mitigate all these risks issues.
Make sure you go review your AR partner’s process and security protocols while ensuring they have the right compliance technology, firewalls, encryption, and physical security to prevent any data breach.
3. Contract lock-ins can be expensive
Outsourcing is usually cost-effective, but, it runs the risk of being expensive if your contract is not structured properly.
For example, you may decide you want to reduce the level of their outsourcing engagement to cut down on cost. But if you have a minimum engagement contract or lock-in period, you might not be able to do so.
In this case, it can become costly with inflexible pricing terms with your AR service provider. Be mindful before signing any new contracts.
4. Negative impact on customer relationships
Lastly, most premium AR service providers are tried and true professionals who are experts in customer communication and management. Pick the right outsource partner who will know how to deal with late-paying customers in a professional way without damaging your relationships.
Your customers are used to communicating and dealing with you. But they can be put off if they are being contacted by a third party for collecting payments. This can even lead to loss of business for you in the future if things get aggressive.
Make sure you conduct periodic check-ins with your loyal customers to discuss their experience and make necessary adjustments in your approach to receivables.
Conclusion: Is outsourcing accounts receivable worth the investment? Yes.
The decision to outsource your receivables depends on your business, payment cycle, quantity of customers, and total invoices that you need collect on. If you find that you are facing consistent payment delays, fragmented workflows within your company, and don't have a defined AR process or collections strategy, outsourcing your receivables is likely the right choice.
Outsourcing can solve your immediate cash flow issues and set the right foundation for your AR team in the future. You can also save on hiring and technology costs by automating the AR process with somebody else.
The best choice in outsourcing would be to use a solution and service like Resolve. Resolve acts like your "AR team on tap" and automates your net terms management and AR collections process. Learn how Resolve can add value to your accounts receivable process and B2B credit management.