Finance management plays a critical role in performing operating activities and leading to the company’s growth and success. Accounts Receivable Management (ARM) is a part of financial management that influences the cash flow, promotes financial stability, and develops customer relationships. It is essential that businesses adopt effective approaches to manage their accounts receivables. However, various companies come across the question of choosing outsourcing the accounts receivables or doing it in-house.
This blog focuses on providing an understanding of ARM, its approaches, and the factors influencing ARM. It also explores the benefits and drawbacks of outsourcing and in-house ARM to allow the companies to make informed decisions.
1. Understanding ARM
1.1. Meaning
ARM includes the plans and processes of managing funds that are owed by an individual to a business. With ARM in place, businesses can manage the funds, profitability, and financial health effectively.
1.2. ARM Approaches
Managing the accounts becomes difficult with the rise and growth of organizations. Therefore, adopting an effective ARM approach is essential for organizations. These approaches are:
- Outsourcing ARM includes appointing a third party to manage the outstanding payments. It involves recovering payments from the customers on behalf of the appointing company. These service providers are specialized in ARM to handle outstanding invoices, make collections, and send payment reminders.
- In-house ARM is the process of managing the accounts receivable within the organization. In this, an internal team handles the overdue invoices, recovering payments, and providing consistent reminders.
Insights:
As per a survey, it is predicted that in 2024 there will be an increase of insolvencies by 29% in North America, 23% in Asia Pacific, and 16% in Europe.
82% of small businesses fail due to improper cash flow management.
In the US, 39% of invoices are paid after the due date.
2. Factors Influencing the ARM
The business world is influenced by various factors that change the direction of final outcomes. Similarly, such factors also influence the in-house and outsourced ARM approaches. These factors are:
2.1. Customer Relationships
The growth and success of the company depend upon the customer relationship. When a company has close interactions, it may opt to manage the accounts on its own. On the other hand, companies targeting cost savings and efficiency can go with the third-party service provider.
2.2. Organization Size
It is understood that the adoption of ARM approaches depends on the company’s size. Large-sized companies have several accounts and high transactional values, attracting advanced systems and technologies. On the other hand, small-sized companies have few accounts and a low number of transactions, which can be managed manually.
2.3. Financial Resources
Outsourcing ARM is a cost-effective method, whereas in-house ARM attracts high overhead costs. Companies with high budgets can opt for in-house ARM and invest within the organization to get adequate results. Companies with budget constraints can opt for outsourcing ARM and focus on their own operations.
2.4. Risk Appetite
Every company has its own risk tolerance level. High-risk tolerant company offers flexible payment options; however, it attracts late payments. Low-risk-tolerant companies stick to rigid credit and security guidelines.
2.5. Market Trends
The business world is affected by market trends. The change in economic and payment market trends can lead to delayed as well as fast payment. For instance, recessions lead to delayed payments; whereas inflation attracts fast payments from customers.
Insights:
On average, the bad debts impacted about 8% of all business-to-business transactions in the US.
In the US, 53% of businesses anticipate that B2B customers’ payments will improve.
50% of the businesses believe that there will be an increase in insolvencies during the year.
3. Evaluating the Pros and Cons
The adoption of ARM approaches requires understanding the pros and cons properly. Let’s move forward and discuss the following points:
3.1. Control
- Outsourcing: This ARM method can provide efficiency and expertise; however, it leads to losing control of ARM operations. Businesses have to depend on the appointed providers to maintain the standards and recover the payments.
- In-House: In this, businesses have enhanced control over their collection operations. Moreover, businesses can modify their strategies based on changing market trends and customer expectations.
3.2. Technology and Expertise
- Outsourcing: Third-party service providers are specialized in managing account receivables, along with having advanced tools and technologies. This enhances the recovery rate.
- In-House: In-house team has limited experience and access to advanced tools and technologies. However, the right investment in training programs and advanced tools can lead to better results.
3.3. Cost
- Outsourcing: It is a cost-effective method as it doesn’t involve investing in additional staff appointments, infrastructure, or training programs. Outsourced parties operate with their own technologies and systems, attracting low cost.
- In-House: It is an expensive method and is suitable for large-cap businesses. This method attracts high overhead costs, along with investment in advanced technologies.
3.4. Customer Relationships
- Outsourcing: In this method, third parties focus on the collection of outstanding payments and improving the recovery rate. However, a lack of empathy and disconnect can lead to the loss of high-value customers.
- In-House: With all the control over ARM operations, this method allows businesses to help maintain long-term relationships with the customers and promote loyalty.
3.5. Scalability
- Outsourcing: Outsourcing is highly scalable, making it easier for businesses to adjust to changing transaction volumes without having to hire additional staff.
- In-House: In-house management may struggle with scalability, especially during periods of rapid growth or seasonal fluctuations.
4. Making the Right Choice
In conclusion, finding the right method to recover payments helps maintain cash flows, redirect customer relationships, and promote business growth. There are various benefits and drawbacks of both the ARM approaches; however, businesses must consider their goals, needs, size, and resources while choosing the right method. Ultimately, the goal of outsourcing and in-house ARM is to attain recovery payment along with maintaining long-term and empathetic relationships with the customers.
