Accounts receivable management determines liquidity and profitability. Those who don't have their receivables under control are financing their customers - often unintentionally and expensively.
What is Accounts Receivable Management?
Accounts receivable management encompasses all processes for managing receivables from deliveries and services - from the credit decision to payment receipt.
Objectives
| Objective |
Description |
| Secure liquidity |
Convert receivables to cash quickly |
| Minimize defaults |
Identify and limit payment risks |
| Optimize working capital |
Reduce capital commitment |
| Maintain customer relationships |
Balance between strictness and service |
The Receivables Lifecycle
+--------------+ +--------------+ +--------------+
| Credit | -> | Invoicing | -> | Payment |
| decision | | | | receipt |
+--------------+ +--------------+ +--------------+
| | |
+--------------+ +--------------+ +--------------+
| Check | | Set | | Monitoring |
| financials | | terms | | & dunning |
+--------------+ +--------------+ +--------------+
Financial Analysis Before Extending Credit
Before Business Relationship
| Check |
Source |
| Commercial register |
Legal form, representation |
| Annual report |
Equity, liquidity |
| Credit agency |
Score, payment behavior |
| Experience |
Industry, own history |
Financial Indicators
| Indicator |
Good |
Critical |
| Equity ratio |
>30% |
<15% |
| Current ratio |
>120% |
<100% |
| Return on sales |
>5% |
Negative |
| Payment behavior (external) |
Punctual |
Delays |
Industry benchmarks. Actual values vary by business model and market conditions.
Setting Credit Limits
Rule of thumb:
Credit limit = Monthly revenue x 2-3 months x Risk factor (0.5-1.5)
Risk factors:
| Financial status | Factor |
|------------------|--------|
| Very good | 1.5 |
| Good | 1.0 |
| Medium | 0.7 |
| Weak | 0.5 |
Payment Terms
Standard Terms
| Term |
Application |
| Net 30 days |
Standard |
| Net 14 days |
Risk customers |
| 2% discount within 10 days |
Early payers |
| Prepayment |
New customers, risk |
Discount Calculation
Discount: 2% within 10 days, due in 30 days
Effective annual interest rate:
= (Discount / (100 - Discount)) x (360 / (Due - Discount days))
= (2 / 98) x (360 / 20)
= 36.7% p.a.
-> Taking the discount almost always pays off for customers!
Differentiated Terms
| Customer type |
Terms |
| A customers (Top 20) |
Flexible, longer terms |
| B customers (Middle) |
Standard terms |
| C customers (Rest) |
Short terms, prepayment |
| New customers |
Prepayment, then standard |
Invoicing
Best Practices
| Aspect |
Recommendation |
| Timing |
Immediately after delivery |
| Format |
E-invoice preferred |
| Content |
Complete, accurate |
| Payment due date |
Clearly stated |
| Bank details |
Prominently placed |
Avoiding Errors
| Error |
Consequence |
| Wrong address |
Delay |
| Missing order reference |
Inquiries |
| Unclear service description |
Complaint |
| Calculation errors |
Credit note required |
Receivables Monitoring
Key Metrics
| Metric |
Formula |
Target Value |
| DSO (Days Sales Outstanding) |
(Receivables / Revenue) x 365 |
<45 days |
| Receivables turnover |
Revenue / Avg. Receivables |
>8x |
| Overdue ratio |
Overdue / Total |
<10% |
| Default rate |
Defaults / Revenue |
<0.5% |
Industry benchmarks. Actual values vary by business model and market conditions.
Aging Analysis
| Age |
Target Share |
Default Risk |
| 0-30 days |
>70% |
Low |
| 31-60 days |
<20% |
Moderate |
| 61-90 days |
<8% |
Elevated |
| >90 days |
<2% |
High |
Industry benchmarks. Actual values vary by business model and market conditions.
Early Warning System
| Signal |
Action |
| Payment >7 days overdue |
Payment reminder |
| Credit limit >80% |
Review before next delivery |
| Negative credit report |
Immediate review |
| Industry crisis |
Portfolio review |
Collection Process
Dunning Levels
| Level |
Timing |
Tone |
| Payment reminder |
+7 days |
Friendly |
| 1st dunning notice |
+14 days |
Firm |
| 2nd dunning notice |
+28 days |
Emphatic |
| 3rd dunning notice (final) |
+42 days |
Ultimatum |
| Collection/Legal |
+56 days |
Handover |
Escalation Process
Due date
| +7 days
Payment reminder (email)
| +14 days
1st dunning notice (letter) + phone call
| +14 days
2nd dunning notice + delivery stop
| +14 days
3rd dunning notice + collection threat
| +14 days
Collection agency or payment order
Communication
| Situation |
Approach |
| First delay |
Understanding, clarify cause |
| Repeated delay |
Firm, show consequences |
| Payment difficulties |
Offer payment plan |
| Unwillingness to pay |
Consistently escalate |
Risk Management
Hedging Instruments
| Instrument |
Use |
| Credit insurance |
Large receivables, export |
| Bank guarantee |
Project business |
| Retention of title |
Standard |
| Factoring |
Liquidity needs |
| Letter of credit |
International business |
Credit Insurance
Costs:
Premium: 0.1-0.5% of insured revenue
Deductible: 10-20%
Coverage: 80-90%
Sensible when:
- High customer concentration
- Export business
- Low-margin business
Factoring
| Variant |
Description |
| True factoring |
Risk transfer to factor |
| Recourse factoring |
Financing without risk transfer |
| Silent factoring |
Customer doesn't know |
Costs:
- Factoring fee: 0.5-2.5% of revenue
- Interest costs: Market rate + markup
Process Optimization
Automation
| Process |
Tool/Solution |
| Financial analysis |
Credit agency API |
| Invoicing |
E-invoicing |
| Payment matching |
CAMT import |
| Dunning |
ERP workflow |
Digitalization
| Measure |
Effect |
| E-invoice |
Faster delivery |
| Customer portal |
Self-service, transparency |
| Online payment |
Faster receipt |
| Automated dunning |
Consistency, time savings |
Team KPIs
| Metric |
Responsibility |
| DSO |
Credit Manager |
| Overdue ratio |
Collection Team |
| First-time-right (invoices) |
Accounting |
| Default rate |
Credit Manager |
Industry Specifics
B2B vs. B2C
| Aspect |
B2B |
B2C |
| Payment terms |
30-90 days |
Immediate/prepayment |
| Financial analysis |
Detailed |
Scoring |
| Dunning |
Individual |
Automated |
| Collection |
Attorney |
Collection agency |
Industry Differences
| Industry |
Typical DSO |
Default Risk |
| Retail |
30-45 days |
Medium |
| Manufacturing |
45-60 days |
Low |
| Construction |
60-90 days |
High |
| Services |
30-45 days |
Medium |
Industry benchmarks. Actual values vary by business model and market conditions.
Conclusion
Effective accounts receivable management means:
- Prevention: Check financials, set limits
- Efficiency: Invoice quickly, automate
- Monitoring: Track metrics, respond early
- Consistency: Structured dunning, escalation
- Balance: Liquidity vs. customer relationship
Every day of faster payment receipt improves liquidity - and reduces external financing costs.
Analyze financial metrics: Firmium provides annual reports and financial metrics for well-founded credit decisions.