09.25.2023 | Posted by Erik
Are You Ready to Outsource AR? Tips from an Accounts Receivable Outsourcing Firm
Managing accounts receivable (AR) can be a challenging task, especially as your business continues to grow. While it’s a critical aspect of your financial operations, it can be time-consuming and complex for your in-house staff to handle these intricate processes – especially if AR isn’t their main responsibility. That’s why many companies turn to accounts receivable outsourcing as a solution.
But when is the right time to outsource, and how do you know you’re making the right decision? You’re in luck – we’ve pulled together all the information you need regarding when it’s most advisable to outsource your AR management based on your stage of business growth and your answers to some key questions.
4 Questions to Answer Before Engaging Accounts Receivable Outsourcing Services
Before we dive in, start by answering some basic questions with the help of your team:
- Do you have an accounting system in place? It’s important to have an AR system implemented before outsourcing.
- Who is currently handling your AR? If it’s the business owner or an employee with a full plate of other responsibilities, it makes a lot of sense to outsource.
- What steps have you taken to work on your AR already? If you have an established billing and accounting system and have already worked out any initial kinks or hang-ups in the process, it will be easier to hand off your AR to an outsourced partner.
- What are your margins and cost considerations? If you have slim margins or low invoice amounts, outsourced AR may be cost prohibitive.
Keep these questions in mind as we explore the different business stages below. Your company may fall into a specific stage but already have more pieces in place than usual, which can also affect your decision. It all comes down to your organization’s unique circumstances, which is why your answers to the questions above can be a good indicator of whether you’re ready to outsource.
At the early startup stage, the focus is often on getting all the pieces in place. You know that you will have AR eventually, but you may not be invoicing yet – or you may not have worked out how to manage AR effectively. Outsourcing can be helpful ¬at this stage only if you already have a clear billing and accounting system in place. If you’re still trying to figure out the basics, it may be too early to work with an accounts receivable outsourcing firm.
Readiness level: It depends
Small but Growing Startups
For small, growing startups, outsourcing can be the perfect solution. Chances are, you don’t yet have a large team or internal resources in place, but you do already have an accounting system set up. Outsourcing your AR at this point can free up your core staff’s time and resources for other tasks – ensuring that your AR management is handled effectively
while you focus on growing your business.
Readiness level: Looking good
For mid-size companies, outsourcing can be a little more challenging. Accounts receivable outsourcing works best at this stage if you have a gap in your in-house team that the outsourced firm can fill and if you already have well-established processes that can be easily transferred to new hands. Some red flags to watch out for as a mid-size company include:
- You already have someone handling your AR – How will that transition look?
- You have bigger issues baked into your AR processes – You need to untangle those issues first.
If either of these ring true for your business, it may be necessary to make difficult decisions or painful changes to your processes in order to outsource effectively.
If you’re still not sure whether it’s the right time, think about why you’re looking to outsource. Is it because your aging looks bad, or because you want your business to be better? It’s hard to ask a new team to come in and do AR triage to an already broken process. But if your goal is to improve your business processes and streamline internal operations, outsourcing may be a great option.
Readiness level: It depends
For larger companies, outsourcing can be a slow and difficult process. There are often more stakeholders involved, which can make it challenging to get everyone on board. If you’re a leader at a larger company, it’s important to do your homework and ensure that every stakeholder is on board before you begin the outsourcing process. Even if one person isn’t on board, it can be challenging for the outsourced AR firm to be effective.
Readiness level: Green light – with full team buy-in
In a Nutshell: When is it Time to Outsource?
In short, the right time is when you need a more scalable solution to help you manage AR more effectively as you grow. Generally, it’s a good idea to consider outsourcing when your company is growing and is no longer an early startup. At this initial growth stage, the owners or one of the initial employees are still handling AR management. When that person no longer has the bandwidth to handle collections, it’s an ideal time to outsource.
But Wait, What About AR Cost Considerations?
One of the most important considerations when outsourcing your AR management
is the cost. How do you know if the cost to collect an invoice is too high? Based on our own experience as an accounts receivable outsourcing firm, if an invoice goes past due, it takes an average of just over 4 touches to collect that invoice, between phone calls and emails. If you calculate the time it takes for each touch based on the hourly rate of the AR specialist, there will always be a threshold where it becomes too costly to collect on an invoice.
Keep in mind that the cost of collection cuts into the margin of every single sale you make, so if your margins are low or the invoice amounts are small, outsourcing may not make sense. For example, if you’re trying to collect on thousands of invoices
each totaling $30 or less, it won’t be very cost-effective to pay an outsourcing firm to follow up on that AR. When trying to collect on smaller amounts with slim margins, we recommend considering automation instead.
Finding an AR Partner in Your Growth
When it’s the right time for your organization, outsourcing AR management can be a great way to streamline operations and ensure that you’re managing your finances effectively. Before making the decision, make sure to consider the stage of your business, your answers to the initial questions we listed, and the cost implications. With the right accounts receivable outsourcing firm
as your partner, outsourcing your AR can be an effective way to improve your bottom line and grow your business.