Risk and Control in Accounts Receivable (2024)

Risk management in AR involves the identification, assessment, and mitigation of risks associated with extending credit to customers and collecting accounts receivable. The goal of risk management in AR is to reduce instances of unpaid invoices and therefore reduce the impact on cash flow.

There are several types of accounts receivable risk that companies need to be aware of and manage effectively. Here we’ll cover three types of AR risk and controls that can be put in place to mitigate them.

1. Credit risk is a significant concern for businesses that offer goods and services to their customers on credit. Some of the controls that can be implemented to mitigate credit risk are:

• Credit checks: Conducting thorough credit checks on new and existing customers helps assess their creditworthiness. This can involve reviewing credit reports, checking credit references, and verifying trade credit history.
• Credit limits: Setting appropriate credit limits for each customer based on their creditworthiness and payment history can help mitigate credit risk. This can include setting maximum credit limits and regularly reviewing credit limits.
• Collateral: Requiring customers to provide collateral, such as a security deposit or a lien on assets, can mitigate credit risk by providing additional security in case of default.
• Credit insurance: Obtaining credit insurance provides protection against the risk of customer default by covering losses resulting from non-payment.

2. Payment risk refers to the risk that a customer fails to remit payment on time. Some of the controls that can be implemented to mitigate payment risk are:

• Payment terms: Setting clear payment terms upfront can help manage expectations and ensure that customers know when payment is due. This can include setting due dates, specifying payment methods, and outlining penalties for late payments.
• Payment reminders: Issuing regular payment reminders can help prompt customers to pay on time. This can include automated emails, text messages, or phone calls.
• Payment plans: Offering payment plans can help customers who are struggling to make payments by spreading out their payments over a longer period of time.
• Invoice accuracy: Ensuring that invoices are accurate and error-free can prevent payment delays. This can involve checking for typos, verifying the correct amounts, and confirming the accuracy of address information, currency and payment details.
• Credit card payments: Accepting credit card payments provides an additional layer of security and reduces the risk of non-payment.
• Cash flow forecasting: Developing cash flow forecasts helps businesses predict payment delays and take steps to mitigate their impact. This can involve monitoring cash flow regularly, identifying potential payment delays, and developing contingency plans.

3. Collection risk refers to the risk that a business will not be able to collect outstanding payments from customers. Some of the controls that can be implemented to mitigate collection risk are:

• Collections policies: Having a clear and consistent collections policy ensure customers are aware of the consequences of late payments. This can include sending regular reminders, applying late payment penalties, and initiating legal action if required.
• Customer communication: Maintaining regular communication with customers builds relationships and encourages timely payments. This can include regular check-ins, updates on account status, and personalized outreach.
• Third-party collections agencies: Working with third-party collections agencies helps recover overdue payments by using legal and ethical means to collect debts from customers who are past due.

Featured Resource: The Collections Playbook

The effective management of risk in AR involves identifying potential risks and implementing controls, like those discussed here, to mitigate them. While there are several controls that businesses can implement to manage AR risk, automation can provide an additional layer of protection. Accounts receivable automation can streamline processes such as invoice generation, payment reminders, and collections, reducing the risk of errors and delays.

Additionally, AR automation provides real-time data analytics that enables businesses to anticipate payment delays and take prompt corrective action. Ultimately, investing in accounts receivable automation can help businesses minimize risk, improve cash flow, and enhance customer relationships.

➜ Take Control of AR Risk Management With the Collections Playbook