Efficient handling of accounts receivable is critical to operations and organizations should regularly measure and manage the cost of accounts receivable processes in relation to annual revenue.
Larger organizations, in general, spend a smaller proportion of annual revenue on executing AR processes, which include setting AR policies, preparing and making deposits, applying remittances, creating reports and posting to the general ledger. Their size and AR volume facilitate leveraging advanced technologies and economies of scale to keep costs down.
Although larger companies might have less to gain financially than their smaller counterparts by increasing AR efficiency, and smaller organizations cannot capitalize on the same economies of scale, all organizations can benefit from proactively managing AR-related processes and redirecting time saved to tasks that add more value to the business.
Before diving into some strategies for achieving this, let’s look at the data.
Benchmarking Data
According to cross-industry benchmarking data collected by the American Productivity and Quality Center (APQC), high-performing companies (25th percentile) spend just $0.18 per $1,000 in revenue, on average, to carry out AR processes. In contrast, companies in the 75th percentile spend more than three times as much — an average of $0.58 per $1,000 of revenue. At the median, companies in the global APQC dataset spend $0.34 per $1,000 revenue.
When we examine only organizations with annual revenues of less than $100 million, however, we uncover a different story. Here, high performers also tend to keep AR costs relatively low ($0.28 per $1,000 in revenue, on average), but at the median organizations spend more than twice as much ($0.77 per $1,000) to perform the AR function, when compared with companies at the median in the full data sample. Low-performing organizations with $100 million in revenue or less spend an eye-popping $2.77 per $1,000 in revenue to carry out the same processes.
Although the baseline cost of managing customer payments is inescapable, this data analysis suggests that many firms have room to improve on this measure. (Note that the APQC data includes outsourced, overhead, personnel, system and other costs.)
Automation, consolidation and documentation
Advanced enterprise resource planning systems that automate payment processing, deposits, general ledger posts and reconciliation are the most surefire way to lower AR costs over time. But these systems require sizeable upfront investment, implementation capabilities and staff verification.
For smaller firms, strategies such as setting up payment portals, accepting more forms of digital payment or instituting subscription or membership business models reduce the manual workload in AR. An analysis of your technology stack can reveal opportunities to improve payment processing and automate deposits with your financial institution.
Organizations that operate in multiple locations with distributed teams often realize efficiencies through consolidation, usually by creating shared service centers. Taking a more centralized approach to AR — whatever that means in the context of your industry and organization — has been shown to reduce costs considerably.
At smaller companies, consolidation can take the form of investing in the accounting workforce. Through training and professional development opportunities, you can expand the capabilities of your small team to encompass more areas of expertise without adding to headcount. With personnel being the single-largest cost driver in AR, the time and financial savings here can be substantial.
Where staff are involved in AR processes, make sure all digital tools are used consistently. Adhering to standard protocols increases accuracy and efficiency.
Likewise, consistent process performance is key. By developing, documenting, and regularly updating AR policies, as well as standardizing procedures that conform with your industry’s best practices, you will reduce errors and rework.
The value of benchmarking
Through the activities of automation, consolidation and documentation, an organization can simplify AR processes and potentially realize significant savings of time and money.
Periodically assessing AR-related expenditures by comparing cost levels against industry peers or a benchmarking database brings benefits to organizations of all sizes. Once you begin to measure and track your performance, your organization will be better positioned to identify and seize opportunities to increase efficiency.
