Accounts Receivable Outsourcing vs. A/R Collections Management Software: What You Need to Know

Accounts receivable is one of the most critical roles in your business. How well your team handles collections determines whether you have the cash to make payroll, pay taxes, and cover other financial obligations. Receivables management can also become incredibly complex and high-risk. This risk compels savvy business managers to consider whether they should use accounts receivable outsourcing or turn to management software.

What Is Accounts Receivable Collections Outsourcing?

A/R collections outsourcing refers to the practice of hiring another entity to manage your collections activities. You may outsource this role to one person or choose a company that employs a team of accounts receivable professionals. Your options depend on the size of your business and the volume of invoices.

Here are some tasks performed by outsourced accounts receivable teams:

• Monitoring delinquency and taking action to get accounts back on track: Professionals generate reports that track delinquency and payments, such as the aging report. Regular monitoring provides the information necessary to take proactive action.
• Chasing overdue payments and generating reminders: Outsourced A/R collections teams follow a consistent process to pursue payment or offer other solutions when payments become delinquent. The company hiring them may determine potential solutions, such as paying in installments.
• Negotiation and settlement for past-due payments: In some cases outsourced A/R collections professionals may work with supervision of their client to negotiate partial payments and payment plans. This commonly happens when customers go through bankruptcy proceedings or wish to avoid the need to do so. Of course you need to put a lot of trust in the team that you outsource if you are going to give them this kind of power.
• Analyzing customer payment trends and identifying high-risk customers: Managers can use this data to determine how to adjust credit offerings to high-risk customers. Doing so may prevent cases of extending more credit than customers can reasonably repay.

What Is Account Receivable Collections Management Software?

Manual accounts receivable management is time-consuming and labor-intensive. Companies streamline processes by using software that can automate workflows. This frees up the team for more value-adding tasks while reducing monotonous work and the probability of errors.

Here are some of the features accounts receivable software may provide:

• Generate real-time updates and reports. Managers need accurate and up-to-date information for decision-making. The software can automate this in real-time and send notifications when KPIs exceed specific parameters.
• Schedule invoices. Automation simplifies invoice processing and sends them on a predetermined schedule. This ensures that customers receive timely invoices and that no unpaid invoice slips through the cracks.
• Integrate with other critical applications. Integration eliminates the segregation of crucial data points and the resulting redundancy. Examples include apps for accounts payable or bookkeeping.
• Automate payment reminders and tracking of delinquent accounts. Regular prompting for delinquent accounts can spur action. Companies must time this effectively based on data-driven strategies.
• Generate insights on client behavior. Data analytics can uncover patterns in customer behavior, such as payment trends. This helps managers make more accurate decisions when granting credit offers and determining appropriate follow-up.
• Provide payment options at the time of receiving the invoice. This reduces payment friction and improves the likelihood of customers paying faster. Easy payments can also bump your company to the front of the line for your customers’ financial obligations.

What Are Some Pros of Accounts Receivable Collections Outsourcing?

Business process outsourcing is a common strategy for companies to focus on what they do best. Is it the right strategy for you? Consider the following benefits:

• Gain more resources without having to increase headcount.
• Complete handing off of the A/R collections function: Some companies want nothing to do with the collections process. Outsourcing allows them to wipe their hands clean of the matter.
• Professional handling for new companies: It takes time to gain experience with accounts receivable, and what works varies across companies. Startups can learn from A/R professionals. They can re-absorb the function in-house when they feel competent.
• Lower administrative costs. Outsourcing business functions typically lead to cost-savings because of economies of scale. Some BPOs reduce costs even more by hiring professionals in lower-paying job markets

What Are Some Cons of Accounts Receivable Outsourcing?

Outsourcing receivables does not work well for every situation and there are drawbacks to outsourcing this important business function. Consider these potential disadvantages:

• Lack of control over customer relations: Outsourced A/R collections teams may not develop good customer relationships like in-house teams do. There is an additional layer between the people collecting invoices and your customer. Companies must weigh their preferences between excellent customer service and cost savings. Plus, the outsourced team won’t have an understanding of your company’s culture and little if any investment in your company’s long-term brand and reputation. 
• Lack of visibility into operations: Outsourcing A/R functions makes it challenging to oversee processes and ensure workers complete tasks correctly. It is best to establish KPIs and the expectations of third parties from the start.
• Costly contract restrictions: Contracts often make it challenging to achieve agility during seasonal spikes or economic downturns. Multi-year deals can also limit your windows for finding and switching to better alternatives.

Bottom line, there is always a risk outsourcing customer-facing functions and accounts receivable collections is no exception. 

Can A/R Collection Management Software Replace Outsourcing?

When you use accounts receivable outsourcing services, these entities rely on software to streamline processes. Why not leverage the power of technology for yourself and oust the middleman? Consider the following benefits of doing so:

• Maintain complete control over the collections process. When you outsource business functions, you sometimes lose the right or ability to make or influence critical decisions. Using software returns that power so that you can determine the best strategies for your business.
• Reduce errors and misunderstandings. There is a learning curve with the use of software, but there is often a much bigger curve as two companies blend processes and cultures to work together. Retaining control allows you to manage learning curves in-house and strategize accordingly.
• Keep your in-house team and maintain employee relationships. Companies often outsource existing business functions, which can lead to the displacement of employees. Existing employees may later jump ship in search of better job security.
• Ensure better scalability as business needs change. Changing software is easier than getting out of a business contract with an outsourcing company. Automation also makes it easier to scale business operations during peaks and downturns.
• Build strong customer relationships. Why should strangers get to know your customers better than you do? Maintaining close and direct relationships puts you in a better position to learn from them and find out how to improve your offerings and processes.
• Directly access key performance indicators and other insights. Why wait for your outsourced business partner to send you regular performance reports? Wouldn’t you rather have direct access to the data? You can if you choose software as your account receivable solution.

What Are the Cons of Account Receivable Management Software?

Every solution has its downsides, and software is no exception. Even so, choosing software allows business owners to retain control, making it easier to anticipate and solve these problems:

• Employees need adequate training. You can reduce the learning curve by choosing intuitive and user-friendly software. Still, you will need to provide training to employees to ensure they leverage the full extent of the software’s capabilities.
• Third-party apps introduce risks. Third-party apps present fewer risks than an entire company does, but there are risks all the same. Choose software providers with strong encryption and other critical cybersecurity practices that protect sensitive data.

Should You Choose Outsourcing or Automation Software as an Accounts Receivable Solution?

Automation software provides the best of both worlds, but it might not meet every business need. If you do not yet have collections professionals and don’t know where to start, outsourcing the task for a year or two could give you the headstart you need. Companies with existing knowledge or teams who want to optimize processes should consider using software instead.

Here are the companies that benefit most from outsourcing:

• Startups that have never handled B2B collections before
• Startups that do not have the time to learn B2B collections
• Smaller companies that don’t have a dedicated person for accounts receivable

Here are the companies that benefit most from using software:

• Startups with limited budgets and a basic understanding of B2B accounts receivables
• Companies with an existing accounts receivable team that want to achieve better levels of efficiency
• Companies that spend a lot of time on repetitive A/R tasks
• Companies that prefer to maintain control of processes and sensitive data
• Companies with finance managers that want more visibility into their collection’s performance and what their teams are doing day-to-day

Why Should You Choose Gaviti for Your Accounts Receivable Automation?

Would you like to reduce the average days late of your invoices by 34%? What about increasing early payments by 3% year-over-year? Does having 9.5 days monthly sound good to you? These are just some of the impressive results our customers have achieved using our accounts receivable software. In what ways will Gaviti help you succeed? Speak to a Specialist to find out.

See why Gaviti is ranked as the #1 Credit & Collections Software on G2: