Exploring Pros and Cons of Accounts Receivable Outsourcing vs. Alternative Option
Managing accounts receivable is a critical component in a B2B landscape, and the effective management of collections directly impacts the cash flow and the organisation's financial health. Regardless, many small and medium businesses struggle to collect accounts receivable (AR) due to traditional processes and inefficient workflows. When teams in a small business take too much time to create invoices, collect payments and post for reconciliation, it increases the risks of bottlenecking your cash flow. Moreover, manual processes are prone to errors and delays, which can compound cash flow issues. Some companies consider outsourcing the process of AR collections, but is this a reliable solution to consider? To address this question, this blog will explore the pros and cons and compare alternatives to find a suitable solution for AR collections.
Role and Responsibilities of AR Team
AR teams in the finance department are responsible for creating invoices to collect customer payments to settle the debt. The number of AR team members depends on the business size and the customers you have. Regardless of the teams, the following are the typical roles and responsibilities of the teams managing AR functions.
- Invoice management function to create and send invoices to customers.
- Tracking of unpaid invoices and late-paying customers.
- Following up on delayed invoices to remind customers to pay.
- Reconciliation of invoices to keep the ledgers consistent against external statements.
- Perform credit checks on customers to determine their creditworthiness.
Core Reasons to Outsource Accounts Receivable
AR teams are challenged for collection management as it is time- and resource-intensive. While the teams are dealing with the invoicing and collections process, they are trading off their time to focus on value-added tasks for an organization. In addition, the fragmented systems and isolated workflows hinder the process which makes them inefficient. Following are some reasons that cause businesses to go for AR outsourcing.
1. Streamlined Processes: This strategy streamlines your AR processes, involving personalized communications, better collections and accurate invoicing. Outsourcing firms have software to automate B2B collections, enabling tracking of payments and managing the entire invoice-to-cash cycle with minimal manual intervention. This saves the time it takes to collect your invoices and frees your resources so they can focus on other strategic tasks that add value for an organization.
2. Access to Advanced Technology: Another reason to outsource AR is access to advanced technology that prevents hiring additional in-house teams. The outsourcing counterpart also saves the costs of investments in human and technological resources to enjoy the benefits of accounts receivable automation, which resolves the cash flow issues.
3. Increased Efficiency and Productivity: The significant reason is that chasing late payments and delayed accounts receivable is not a challenge anymore, all the headache is for outsourced units to manage collections. In other words, outsourcing doesn't demand the attention of the organization, among other practices, including chasing payments and tracking outstanding debt.
All these reasons force companies to consider accounts receivable outsourcing, which also benefits them to work on tasks that contribute to the organization’s strategy.
Pros and Cons of Accounts Receivable Outsourcing
Benefits of Outsourcing AR Function
1. It improves invoice management and collection efficiency, prompting cash inflow and working capital. With the efficiency of collecting, you can satisfy customers with accurate invoices and settle debt to sustain the company's cash flow.
2. Cost savings is the most significant advantage of outsourcing, where you don't have to allocate human resources, reducing operational expenses. This also eliminates the cost of training the AR teams in-house to work on collections
3. Improved credit risk management will reduce the likelihood of bad debt, which often impacts an organization's financial health. By outsourcing AR, organizations can mitigate this risk and maintain a more substantial cash flow.
4. With an integrated billing and collection systems, your outsourcing partner can navigate using siloes that contribute to impeding your payments. Outsourcing ventures have automation solutions to track invoices and expenses, making tracking and generating comprehensive financial reports easier.
5. By reducing the DSO, you can speed up your invoice collections, which can improve your cash flow. The DSO stands for days sales outstanding, a measure to determine the days a company takes to collect invoices. Outsourcing firm can speed up your collections which reflects in your cash flow and financial health of your organization.
Disadvantages of AR Outsourcing
1. Lack of control is a significant disadvantage where a company relies on third party to manage your AR operations. This results in loss of control over the financial process, which can harm your company's reputation including your customers.
2. Security and customer privacy concerns pose an enormous risk with outsourcing as it increases the risk of data theft and leaks of information related to customers, business profitability and other financial data.
3. Contract lock-ins can be expensive, which can affect you when your business is low. The outsourcing firm charging you will not change if you have a seasonal demand for your product, which may affect your profitability.
4. Negative impact on customer relationships is another drawback of outsourcing, where it is up to the company to deal with late-paying customers. If they are confronted, it will result in adverse customer experiences and may result in loss of customers.
Alternative to Accounts Receivable Outsourcing – AR Automation
Before concluding whether outsourcing is a reliable option, it is essential to discuss whether there is another option that can be more reliable to navigate the disadvantages of outsourcing. The answer is acquiring an accounts receivable automation solution to streamline invoice-to-cash workflows and resolve cash flow issues.
By employing an accounts receivable automation solution, you can have higher control over your invoices, collections and financial reporting, all while streamlining the entire invoice-to-cash cycle. This will make your workflows efficient and free your AR teams to work on strategic tasks. With an automated AR solution, you can reduce operational costs associated with the process without installing a new infrastructure to leverage technology. This can be done by choosing an accounting software that integrates with your existing ERP or accounting software to streamline your processes.
So, is outsourcing a reliable solution for small business organizations to manage accounts receivable? The answer is NO because AR automation solutions can resolve all the outsourcing issues without investing in technology. This gives you an insight into analytics and also makes your financial reports accurate so you can make well-informed business decisions.