No matter the size of a business, outsourcing AR (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, when you need it is a powerful tool for any business.
In this series, we will publish four articles detailing why a business may want to outsource various functions in the intermediate growth stages or even earlier. We will start with accounts receivable (AR).
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.
AR 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. And when customers are late in paying, which has its obvious detrimental effects, the AR 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 maintain an AR department?
For small businesses operating on a cash basis, they may wonder why they need AR 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 on their own AR to turn over so they can pay the bills.
For businesses with many customers and orders, 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.
Why Outsource AR?
By outsourcing AR, businesses can free their employees to work on the product. The engineers, visionaries, and creators are probably uninterested in chasing down payments and maintaining the billing system. Outsourcing allows the company to operate essential but non-product-oriented 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.
Professional AR personnel will have a solid background in the field, which means they bring plenty of expertise with them that the hiring company would have to otherwise build from scratch, likely via trial and error (with an emphasis on “error”). But in the critical growth stage, it is best to avoid errors, especially when it comes to maintaining relationships with customers yet to pay.
Professional AR personnel already know how to deal with late-paying customers and how to finesse the customer into paying without damaging the relationship. They could help develop invoicing forms to give the business a more professional image when billing. When customers demand refunds or credits, the AR professional knows how to reassure the customer, judge the claim, and appropriately apply credits where due.
Regarding business strategy, an outsourced AR professional could assist in developing a thorough and widely-applicable collections policy, using experience from other companies to determine what is best for any particular organization.
They might be able to assist in building or choosing an in-house billing and invoicing system based on prior experiences. When the business hires a full-time AR professional down the road, the system will already be in place for them.
Or if the hiring business doesn’t require an in-house system, an outsourced AR professional might be able to perform services with their own software licenses and systems, cutting costs on IT and new software training time for existing employees. An example might be gaining access to professional-grade OCR software for digitizing paper invoices.
A final area of expertise is financial. AR personnel will be able to reconcile discrepancies in accounts to avoid mismanaged books. They can work with in-house or other outsourced professionals to create financial reports, and they will know the state of incoming revenue and how that affects liquidity.
AR personnel might also perform credit checks for new credit requests. Analyzing a credit report, coming to a decision, and communicating that decision to the customer is a daunting process for those who have little experience. Furthermore, outsourced professionals offer an additional advantage: impartiality. Those who work directly for the company may feel it necessary to attract customers at any cost, including granting credit where it should not be granted. Conversely, outsourced staff can avoid this bias towards “helping” the business and focus entirely on the hard financial numbers.
For businesses that do not yet need a full-time person to handle all accounts receivable but cannot handle the volume or nature of the function on their own, outsourcing is an excellent compromise between full-time and do-it-yourself. The most value for the hiring company comes from the bundled expertise and experience, but businesses can benefit from lower costs (than full-time) and current full-time employees having more time to work on the product and grow the business.