Selling to customers on credit is a common and important customer service that can expand a company’s revenue potential beyond cash sales. But this opportunity also comes with the burden of creating and distributing invoices, collecting from customers, applying cash payments and, of course, managing and monitoring the whole process — a process that can quickly become cumbersome for even low-volume businesses. Any mismanagement can create issues that cause critical cash flow problems and spoil customer relationships.
That’s why companies of all sizes have converted to accounts receivable (AR) automation, though the extent of automation varies significantly. This is best illustrated by the wide range in the average cost to process a customer invoice — from $2 to $9, according to the American Productivity and Quality Center (APQC), which attributes the difference to the amount of automation in the process. As impressive as that difference may be, the benefits of AR automation extend beyond just cost savings to improving the entire AR process.
What Are the Benefits of AR Automation?
In addition to cost savings, AR automation offers businesses many benefits. The most significant is the ability to improve cash flow by speeding the order-to-cash (OTC) cycle, which refers to a company’s end-to-end activities between making a sale to a customer and receiving payment. AR automation works to reduce that time — a shorter OTC cycle means that cash is received more quickly — especially when it is integrated with front-end systems like order and inventory management. It can also reduce days sales outstanding (DSO), which measure how many days it takes for a sale to be paid. Automated AR reduces DSO in several ways, such as speeding up the invoicing workflows, which in turn speeds cash flow and increases a company’s liquidity.
- AR automation is the process of automating any paper-based and manual accounts receivable process — from creating and issuing invoices and managing customer credit to payment and collections.
- For most organizations, the biggest benefits of AR automation are reduced costs and faster cash flow.
- Additional benefits include better customer service, security and management insight.
- An AR system that integrates with order management and accounting software optimizes the return on the automation investment.
Accounts Receivable Automation Benefits Explained
AR automation offers many business benefits. The ability to process invoices and customer payments quickly and efficiently — the hallmarks of AR automation — leads to increased efficiency, enhanced security and better management oversight. AR automation also enables companies to more effectively organize and protect customer data, as well as better monitor and manage the AR process and analyze resulting data through real-time access and reporting tools, such as dashboards.
In addition, the accuracy, timeliness and convenience of AR automation builds customer confidence. Automation increases the level of consistency and professionalism in the AR process by using standardized processes, such as reminders and dunning notices. AR automation also helps reduce the number of uncollected receivables, which is another key AR objective for organizations.
Challenges With Manually Accounting for AR
Manual processes are prone to error and inefficiency. This is especially true of the AR process, which for most companies is a high-volume function. The impact of inefficiency and errors can be significant, including slower cash flow and a higher rate of bad debts. Manually accounting for AR also can negatively impact future sales. For example, lost documents, incorrect data on invoices or mistaken delivery of invoices result in extra work and collection snafus for the company, as well as frustration for the customer. Security breaches and misapplied payments can also create embarrassing strains on customer relationships.
Top 11 Benefits of AR Automation to Know
The benefits of automating a company’s AR process are far-reaching. Following are many of the most common and important benefits.
Improved speed and efficiency.
Automation helps increase the productivity, efficiency and accuracy of the AR team. Using digital templates, staff can generate more invoices relative to the time it would take to generate them manually, and online delivery puts invoices into customers’ hands faster. The faster invoices can be created, the sooner the clock can start ticking on payment terms. More complex billing schemes, such as consumption-based billing, can be calculated faster and with greater accuracy, as well.
Reduction in human error.
Manual invoice generation is repetitive, tedious and prone to errors, such as omissions, transpositions, duplication and typos. AR automation reduces the number of mistakes through the use of integrated databases that automatically fill in customer data and product details, as well as automated matching that links customer purchase orders to shipping details and invoices. Automation also reduces the time and labor involved in correcting errors and can mean fewer — or no — embarrassing and time-consuming interactions with customers to resolve issues.
Automated AR reduces costs in several ways. For example, increased productivity due to automation can minimize the amount of staff time needed to simply process data so they can work on higher-value activities, such as investigating and resolving exceptions. It may even be feasible to reduce the size of the team. AR automation also decreases the rate of uncollectible accounts because invoices are more accurate and can be sent to customers faster. When combined with better management tools, like dashboards and real-time AR aging reports, customer accounts can be managed more closely, which helps reduce bad debt.
Improved cash flow forecasting.
AR automation helps a company get the maximum amount of cash collected in the fastest amount of time, increasing cash flow. In addition, it improves a company’s ability to forecast future cash flows because of more reliable and consistent collection patterns, which can be monitored using enhanced reporting with real-time data.
AR dashboards provide easily digestible data, customized to help with day-to-day tasks or high-level decision-making, depending on the user’s role. Customer-level specifics, like real-time aging reports and customer master files, are accessible at both summary and detailed levels. Dashboards also display key performance indicators, such as AR turnover and DSO, as well as AR department activity such as processing output, payment collection and error rate.
Advanced security and compliance.
Automation helps secure the AR process, especially critical when it comes to sensitive customer data and payment processing. Automated AR eliminates manual processes, such as email and paper files, that are particularly vulnerable to security breaches and fraud. Further, since many AR teams have migrated to a distributed work environment, it has become even more important to be able to access and store AR and payment records in a secure environment. Compliance with local regulations — such as sales tax and e-billing and data protection regulations — is easier because automated AR systems are standardized and data is automatically archived, securely stored and organized for auditability, whether a company operates on one area or in multiple jurisdictions with different regulations.
Reducing a company’s DSO leads to increased cash flow and fewer write-offs for bad debt. AR automation helps organizations meet these objectives by enabling them to send a higher volume of invoices to customers in a more accurate and timely manner. AR automation systems also allow organizations to customize invoices with information that makes it easier for customers to validate their purchases, such as purchase order data, itemization, project codes and delivery information. Invoice consolidation also increases the probability that customers will quickly approve invoices and submit payment. Equally important, automated AR can send proactive payment reminders and dunning notices on regular intervals, to keep payment top of mind for customers and accelerate cash flow.
Better customer service.
The AR process touches the customer, so it has to be timely, accurate and professional, from invoicing to collections. It’s also important to make the payment process as convenient and simple as possible, alleviating processing costs for customers’ accounts payable teams. AR automation helps organizations meet each of those objectives, building customer trust and reducing uncomfortable disputes.
Reduced cost of payment processing.
Studies show that AR automation can drastically reduce the costs of processing invoices and collecting payments. Different studies cite different statistics, but they all boil down to significant costs savings when using an automated AR system versus performing AR manually. The $7 reduction in invoice processing reported by the APQC is similar to other statistics that indicate significant cost reductions when using automated AR versus manual processes. Savings come from reduced labor, better workflow and lower overhead costs.
An automated AR system gets everyone involved in the OTC cycle on the same page, including those outside the AR team. For example, sales teams can be made aware of customers’ past due balances, order fulfillment personnel can be made aware of required customer documentation and business leaders can be provided with better insights into current and future cash flow. The automated AR system becomes a single source of truth that no manual process can rival with ad hoc spreadsheets and reporting.
Access to real-time data.
Automation eliminates the tangle of spreadsheets, multiple subsystems and the potential for conflicting data that come with manual AR. An automated AR system provides real-time visibility into AR data, including open invoices, closed invoices, aging and payment history and pending data, such as unbilled orders. This keeps everyone on the team working with the most up-to-date information, which is especially important when engaging with customers.
What to look for in an AR/AP solution.
Get Real-Time Data and Save Time With AR Automation
AR automation can significantly improve not only an organization’s OTC processes, but also critical aspects of the business, including better cash flow, reduced costs, improved customer service and tighter security. However, not all AR automation systems afford all of these benefits, especially if the systems are focused on only certain parts of the AR process. NetSuite Accounts Receivable takes a holistic view of AR and AR automation, addressing each part of the AR process — from sending invoices to establishing credit terms to managing collections and compliance, enabling companies to gain the liquidity needed to shorten the credit-to-cash cycle and position themselves to be able to fund growth and act on investment opportunities. Configurable, real-time AR dashboards and reporting makes it easier to track the entire process and flag areas that need to be addressed.
Automating the AR process offers many benefits for companies of all sizes and in all industries. The most significant come from AR automation systems’ ability to generate and distribute more invoices more quickly and accurately, at lower processing costs. This also improves customer relationships and, when combined with automated reminders and collection tools, decreases DSO. Beyond the benefits to cash flow and cash flow forecasting, AR automation provides a more standardized workflow in a more secure environment. The enhanced dashboards and access to real-time data help organizations make better-informed decisions and manage this high-touch customer-facing process in the most effective and efficient way possible.
AR Automation Benefits FAQs
Why is it better to automate your AR process?
Automated AR has been shown to reduce costs, increase accuracy and reduce days sales outstanding (DSO). The benefits to cash flow and customer service are significant, as are the enhanced security and administrative features. Manual processes for high-volume activities like AR are prone to errors — errors that are highly visible to customers — and can’t match the reporting and monitoring capabilities of an automated process.
What are the benefits of accounts receivable?
Accounts receivable arise from selling goods and services to customers on credit. Extending credit is a strategy to increase sales beyond only accepting cash payment.
What is accounts receivable automation?
AR automation is the process of automating any paper-based and manual accounts receivable process — from creating and issuing invoices and managing customer credit to payment and collections. Not all AR automation systems are created equal, but some offer reporting capabilities to help manage the AR process and the AR team, as well as integration with ERP modules such as order management and accounting. AR automation reduces costs and increases collections, with the capabilities of the automated AR platform being used determining the degree to which these and other benefits can be realized.
Why is monitoring accounts receivable important?
Accounts receivable represent money owed by customers for goods and services. Converting these debts to cash is critical — the longer a receivable is outstanding, the less likely it is to be collected. Uncollected receivables are costly because they represent lost revenue on items already produced and delivered.