Deep Dive: AR Automation and Overcoming the Challenges That Can Prevent Successful Implementation

digitizing payments in accounts receivable. AR automation and AR digitization

Download the Working Capital Playbook, Accounts receivable guide to AR automation and AR digitization

Accounts receivable (AR) processes are a necessity for all businesses that deal with a substantial number of customers. Firms must ensure money arrives on time and is in the right place for corporate uses, including payroll, vendor payments or cash management purposes.

This vital everyday process can be surprisingly complicated, however, with 93% of organizations receiving late payments from customers that result in delays and errors. These issues, in turn, prompt the average business to write off 1.5%of its receivables.

Many companies’ margins are so tight that even this seemingly nominal loss can mean the difference between solvency and bankruptcy, and many are exploring numerous solutions to reduce these late payments and errors. AR automation has demonstrated a high level of efficiency reducing the share of bad debt, but the industry’s reliance on paper payments has significantly hindered the technology’s broader implementation.

The following Deep Dive explores the benefits organizations can reap via AR automation, the obstacles preventing its widespread use in the corporate world and how businesses can overcome them.

Advantages of AR Automation

The challenges preventing timely and accurate AR operations have grown over the past 12 months, according to experts in the field. A study of payment decision-makers found that 80% say it takes more than 20 days to receive payments from customers. These delayed payments have had significant downstream effects on organizations’ cash flows, with half of payments leaders saying at least 7% of their payments have failed over the past 12 months. One key metric in measuring AR effectiveness is days sales outstanding (DSO) — the average time it takes to collect payment for sales. More than 80% of the study’s decision-makers said reducing DSO is a top priority over the coming year, and even modest improvements in this field could lead to significant overall business improvements.

AR automation could play a critical role in shortening payments delays, minimizing AR errors and reducing DSO. These systems delegate day-to-day processes such as collections and invoicing to artificial intelligence (AI)-aided solutions, significantly reducing the capacity for human error and accelerating complex calculations that tend to be tedious for accountants. Eighty-seven percent of firms using AR automation reported gains in overall process speed, and 75% said AR automation had improved their customer service. DSO among automated businesses also dropped significantly, with the average automated business seeing a DSO of 40 days compared to 47 days for firms conducting their AR operations manually.

AR automation may seem like a silver bullet for firms looking to improve their accounting efficiency and cash flow procedures, but many firms lack the capacity to implement the technology for a variety of reasons. Chief among them is a reliance on paper checks and other manual payments.

Paper Checks Can Hinder AR Automation

Digitization has become the norm in consumers’ personal and professional lives and affects every sector, including retail, banking and even telehealth. Many firms still rely on traditional paper-and-pencil accounting and payments, however. The portion of B2B payments made via paper check certainly has declined in recent years, plummeting from 81% in 2004 to 42% by the end of 2019, but they have hung on tenaciously across multiple use cases. A PYMNTS study from 2020 found that 81% of firms still use paper checks to pay other businesses at least occasionally, and while the overall volume of check-based payments is declining, their average value is on the rise. The mean B2B check was valued at $526 in 1998, but its 2020 counterpart was worth $2,600.

Automating AR departments that still largely rely on paper payments can be an exercise in futility, as these checks need to be scanned into accounting solutions or entered manually. This process can be time-consuming and prone to errors that AR automation cannot fix, as it relies on human data entry for its own calculations and cash flow decisions. The quality of data to which AR departments have access could remain substandard unless they can digitize their payments before implementing automated AR processes.

Payments digitization enables the implementation of AR automation and reduces the risk of check fraud, which was reported by 66% of payments professionals in 2020. This fraud reduction, coupled with accuracy and timeliness improvements, makes payments digitization and AR automation a winning combination when it comes to improving firms’ cash flows and overall revenues.