The Hidden Costs of Inefficient Accounts Receivables

Imagine a high-flying rocket, soaring through the cosmos, on its mission to find new planets and places. The rocket's trajectory is meticulously planned, its engines roar with power, and its payload promises to revolutionize the future. But what if, unbeknownst to the engineers, a tiny leak is slowly draining the rocket's precious fuel? A leak so subtle, so insidious, that it goes unnoticed until it's too late. 

This is the predicament many startups and scale-ups find themselves in. Understandably, they're focused on growth, on scaling their operations, on capturing new markets by pouring resources into marketing, sales, and product development, all while aiming to outpace their competitors. 

While the world may be captivated by the rocket's ascent, beneath the surface, the silent drain is siphoning away their precious resources, often revealing itself as a problem when it's far too late: 

Inefficient accounts receivable (AR) processes.

And while for some this comparison may sound a little bit dramatic, in this article, we will show exactly where resources are drained, how many of them and why AR automation can never come “too early.”

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The Silent Drain: Manual Tasks and Wasted Time

We bet that everyone would agree that, for every profitable business, getting paid is a top priority in their daily activities. 

This is where accounts receivables come into play. At the heart of AR lies a series of tasks:

• Invoice Generation: Creating accurate invoices, often manually, is time-consuming.
• Payment Tracking: Monitoring payments, chasing overdue invoices, and reconciling accounts can be tedious and error-prone.
• Customer Communication: Responding to queries, resolving disputes, and following up on payments requires significant human effort.
• Reporting and Analytics: Deep dive on financial KPIs and cash flow metrics
• ‍Credit Management: Manage late payments and credit worthiness of customers

These tasks, while essential, are repetitive and often mundane. They consume valuable time and resources, diverting attention from strategic initiatives.

Especially in startups and scale-ups, companies often run a half-baked solution.

Somewhere in-between Excel, shop systems and invoicing software, it is more important to get a process off the ground than to implement the best practices. These players are rather focused on focussing on direct revenue impact actions such as building the product, doing marketing and sales.     

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Breaking Down the Hidden Costs

While in the first steps of a company journey, doing things manually or sub-optimal is totally understandable, at a certain point the cost-benefit equation slowly turns into negative territory. 

From experience this inflection point can start from as low as 50 invoices per month. This is usually the number of invoices a company needs to introduce some sort of complexity into their AR operations as they normally employ zero to max. one FTE as dedicated resources (eg. Finance Manager, Collections Agent, etc.) at this point. 

These inefficient AR processes can lead to the following and significant hidden costs:

• Manual Data Entry: Tedious tasks like inputting customer information, invoice details, and payment data consume valuable employee time. For instance, a single employee might spend 2-3 hours per day on data entry, equating to 10-15 hours per week. That’s about 20-30% of his salary/time. 
• Non-Integrated Processes: Disconnected systems and manual workflows can lead to delays, errors, and inefficiencies. Doing exports, switching applications for different tasks as well as formatting data all have a cost attached and can drain as much as 20% of the employee time. 
• Manual Follow-Ups: Chasing overdue payments can be time-consuming and frustrating. A single follow-up call can take 10-15 minutes, and with a large number of overdue accounts, this can quickly add up. If an employee spends 30 minutes per day on follow-ups, that's 2,5 hours per week of his time. 
• Data Entry Mistakes: Human error is inevitable. Even small mistakes can lead to significant consequences, such as delayed payments or incorrect invoices. Research suggests that manual data entry can have an error rate of 1-3%, which can lead to significant financial losses and damaged customer relationships.
• Calculation Errors: Miscalculations in invoices or payment applications can result in financial losses and damage to your company's reputation. Even small errors can accumulate over time, impacting your bottom line.
• Oversight and Missed Deadlines: Human error can lead to missed payment deadlines, resulting in late fees and penalties. For example, a single missed payment deadline can cost your company 35-50€ or more in late fees.
• Distractions and Interruptions: Manual tasks can be easily interrupted, reducing employee focus and productivity. Studies have shown that interruptions can reduce productivity by up to 40%.

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The Asymmetrical Cost of Growth

Apart from the hidden costs for inefficiency, most startups and scaleups also underestimate the asymmetrical cost increases for growth itself.  

As your business grows, so too does the complexity of your AR processes. A 10% increase in revenue can lead to a 20% or even 30% increase in AR workload. Especially, if your basket sizes are small. 

This asymmetrical growth can quickly overwhelm your team, leading to:

• Delayed Payments: Slow invoice processing and inefficient follow-ups can result in delayed payments.
• Increased Bad Debts: Poorly managed AR can lead to a rise in bad debts, eroding your bottom line.
• General Process Amnesia: The amount of un-processed transactions/invoices can block internal resources and focus from your employees.  

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The Customer Experience Conundrum

And then there is also the customer, of course. 

A disjointed AR process can significantly impact customer satisfaction. When customers face delays, errors, or unresponsive support, they're more likely to seek alternatives.

Reasons for poor customer experience include:

• Unfair credit holds: Customers may be unfairly subjected to credit holds, leading to frustration and lost sales.
• Lack of real-time payment status visibility: Customers may be unable to track the status of their payments, leading to uncertainty and anxiety.
• Syncing issues between teams: Miscommunication and lack of coordination between sales, customer service, and AR teams can result in a poor customer experience.

Unless a company holds a monopoly, these collections experiences are unlikely to get customers positively associating with a company.

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The Solution: AI-Powered AR Automation

The answer to the outlined challenges lies in automation, specifically AI-powered automation. With the rise of software and now AI, tedious and repetitive tasks can be replaced by smart automated functions.

By leveraging AI, startups and scale-ups can:

• Accelerate Invoice Processing: AI-powered tools can automatically generate hyper-individual and accurate invoices, reducing manual effort and speeding up the process.
• Improve Payment Tracking: AI can monitor payments, identify trends, and flag potential issues, enabling proactive intervention.
• Enhance Customer Communication: AI-powered workflows can provide instant support, answer common questions, and resolve simple issues, freeing up your team to focus on complex problems.

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Key Benefits of AI-Powered AR Automation

Other benefits of automation include:

• Increased Efficiency: Automate repetitive tasks to free up your team's time.
• Improved Accuracy: Reduce errors and inconsistencies in your AR processes.
• Faster Payments: Streamline the payment process to accelerate cash flow.
• Enhanced Customer Satisfaction: Provide a seamless and responsive customer experience.
• Better Data-Driven Decision Making: Gain valuable insights into your AR performance.

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The Time to Act is Now

Don't let inefficient AR silently drain your resources. By embracing AI-powered automation, you can:

• Protect Your Bottom Line: Reduce costs and increase revenue.
• Enhance Customer Satisfaction: Build stronger relationships with your customers.
• Drive Growth: Focus on strategic initiatives and achieve your business goals.

The future of AR is AI-powered. By taking action now, you can position your business for long-term success. Even before the problem starts pressing.

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