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6 Necessary Steps for Conducting Risk Assessment in Accounts Receivables

Risk is inherent to every business process, but in accounts receivables, excessive risk creates big downstream problems. Cash flow, performance, client relationships, and more, all depend on your collections processes. As such, a rigorous accounts receivable risk assessment process helps you identify potential areas that may trip you up over time.

These six tips will lighten the burden of risk assessment and show you how to reduce accounts receivable risk overall.

1. Learn Customer Industries

Risk assessments in accounts receivables collection are all about tracking unknowns. The more unknowns you eliminate from the equation, the less risk you’ll have to deal with. A good place to start is with a thorough review of each customer’s industry, including what their costs are, what type of processes they have, and how they manage their money and business internally. This is a win-win process of understanding which generally leads to stronger relationships with clients. The more you know about their services, the more confident they feel in your partnership.

2. Review Costs

The above steps (and many aspects of risk assessments overall) come down to a single question: how much are collections processes costing your company? Take stock of all the costs associated with collecting an invoice, including employee labor, time spent on reports, and managing the invoice processing itself. You may find that particular clients require so much hands-on work that they end up costing your company more than they’re providing.

3. Monitor Aging Reports

Another essential step of accounts receivable risk assessment is keeping tabs on your aging receivables reports. If you have high rates of unpaid customer invoices, it may signal problems for your company’s cash flow. But just as importantly, it’s indicative of more serious problems with your accounts receivable management overall. Use aging reports as a benchmark for these processes and determine whether a more thorough evaluation of your collections processes is needed.

4. Handle Deteriorating Payment Plans

Risk management is about preparing for the inevitable—which in A/R collections terms means having a plan for when clients can’t pay. If you find your agreed-upon payment terms not being met, it helps to have an arrangement lined up in advance. Start by finding out whether this is a recurring issue or something brought on by a new development (such as COVID-19). From there, have a structured plan for the next steps, including dunning emails, phone calls, or even legal action, if necessary.

5. Make Team Training a Priority

Make sure that your collections team is well trained in your collections process and the steps you intend to take when things go wrong. Given that long-term collections processes are often a game of client management (accounts receivable automation aside), it pays to have a team that knows how to manage these relationships. Create clear guidelines for everyone to follow and you’ll have an easier time keeping your cash flow steady.

6. Plan for Crises

Crises are inevitable in your process, whether it has to do with your own company or your clients. As such, any risk assessment strategy should account for the unexpected. Have dedicated processes for following up with delinquent clients. Create a plan of action to keep cash flow safe when the payments dry up. And just as importantly, come up with a way to communicate these issues to each client while still preserving your business relationship.

Don’t Let Risk Slow You Down

Accounts receivable risk management is a function of covering your bases, training your team, and of course, leveraging the right technical solutions to make your process easy. In particular, accounts receivable automation benefits companies of all sizes, with a specific shout out to growing companies just getting a handle on their A/R collections. Accounts receivable automation tools both support and complement your company’s risk assessment goals, giving you the solutions you need to manage risk with ease.

Contact Gaviti for more information on how automation supports your company’s A/R collections.

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