Why Outsourcing Accounts Receivable Makes Sense
Accounts receivable outsourcing is a business practice where a company hires a third-party vendor or partner to handle some or all of its accounts receivable functions. This outsourcing company may take care of tasks such as invoicing customers, tracking payments, following up on unpaid bills, and performing customer credit checks, and more.
By outsourcing these tasks, companies can free up valuable time and resources to be applied to other core business operations or to focus on complex A/R issues that are best handled internally. Ideally, outsourcing helps businesses reduce their overhead costs, as they don’t have to hire and train their staff to handle essential accounts receivable processes.
No matter the size of a business, outsourcing accounts receivable is useful in many aspects. Growth-oriented businesses may not yet require a full-time AR clerk or analyst; enterprise-sized organizations may need to rapidly scale up their accounting departments during busy times of the year. Either way, finding the talent you need, you need it is a powerful tool for any business.
The roles of accounts receivable?
The AR department has two broad functions: tracking revenue expected to be received (invoicing) and making efforts to collect those revenues. Auxiliary roles include assisting in the generation of financial statements and the design of customer-facing forms, like invoices. All of this is often supported by IT systems, which AR personnel must understand.
Accounts receivable might also perform credit checks on customers requesting credit. Not every customer is in a creditworthy position, so AR adds a layer of protection against nonpaying customers. When customers are late in paying, which has obvious detrimental effects, the accounts receivable department makes attempts to collect the outstanding balance.
Finally, in the process of tracking who owes what, AR tends to make reconciliatory adjustments to the accounts, finding and fixing errors in input. Sometimes they consider customer requests for refunds and credits, adjusting accounts accordingly.
Why have an AR department?
For small businesses operating on a cash basis, it may be a question why they need accounts receivable at all. For cash businesses interested in expansion, the most compelling reason for AR is building the customer base: moving from cash-only to credit-granting can greatly increase the number of customers willing to purchase from the company. The customers may themselves be waiting for their own AR to turn over so they can pay the bills.
For businesses with many customers and credit payment terms, it is important to keep everything consistent. By neglecting to create an AR department, the business could suffer from missing payments or poor bookkeeping, as accounts on credit and cash accounts become commingled.
Can You Outsource Your Accounts Receivable?
As with most business scenarios, there is no straight answer. Your organization may find that there are many benefits to outsourcing their accounts receivable, or it might prove to be an unmitigated disaster that undermines your financials and your reputation.
The timing of your business cycle, your overall sales totals, the geographic location of your customers—you should reflect on all of these factors and more when you consider outsourcing your accounts receivable efforts. You should weigh the potential advantages of your decision and the disadvantages as well.
How much could you shorten your day’s sales outstanding (DSO)? How much risk are you taking on board? How established is this vendor? Ultimately, you want to engage in a deliberate, nuanced discussion with all relevant stakeholders regarding how this decision might impact your business.
Why your business should consider Outsourcing Accounts Receivable in Nigeria
By outsourcing accounts receivable, businesses can free their employees to work on the product. The engineers, visionaries and creators should not be spending valuable time chasing down payments and maintaining the billing system. Outsourcing allows the company to operate essential but non-product functions on a shoestring budget.
The popularity of cloud services (SaaS, DbaaS, etc. on Azure, AWS, and others) stems from only paying for needed computation time or storage space; similarly, outsourcing AR can benefit a business by letting them only pay for services when they need them and to the extent that they need them.