Optimizing your SaaS accounts receivable process

SaaS companies have been known to lose up to 10% of their revenue to poor accounts receivable management.  So for SaaS CFOs, designing a streamlined accounts receivable process is a crucial pillar in execution. After all, optimizing cash flow is part and parcel of your role, and minimizing outstanding invoices with a solid accounts receivable process that includes analytics will go a long way toward accomplishing that.

In this post, we’ll cover: 

• How to optimize your cash cycle with end-to-end receivables for effortless account reconciliation. 
• How to use accounting software and e-invoicing for faster payments and increased working capital. 

First, though, we need to clarify some important terms. 

Accounts receivable vs. deferred revenue: some quick definitions 

SaaS businesses operate on the basis of gradual revenue recognition. ASC 606 mandates that you recognize your revenue over time as you satisfy the service obligations connected to it. 

Accounts receivable, on the other hand, refers to services you’ve rendered but haven’t been paid for yet. If you don’t feel much urgency around your accounts receivable management, you should. The SaaS industry takes substantial yearly losses from missed payments, high credit risk customers, and involuntary churn. High credit risk customers can also be screened out through effective credit management strategies, including monitoring customer payments with AI.

Why is an accounts receivable process essential for SaaS? 

An accounts receivable process is important for any business, but it’s uniquely crucial for SaaS organizations. Why is this the case? SaaS companies often have longer days sales outstanding (DSO) than other businesses, meaning they have to wait longer to receive payment for their services. 

In light of that fact, being proactive about your DSO optimization is critical. What else makes effective AR pivotal to financial success?

Receivables are numerous in SaaS

The large volume of billing methods in the SaaS industry makes real-time visibility for your AR team essential. For instance, a usage-based SaaS business might have receivables for overages purchased by customers who paid on credit and whose cards have since declined.

Or, as another example, say you have a feature tier billing model that allows customers to add or subtract features at will. A customer added three extra features using their credit card, which resulted in bad debt when the time came to pay. That revenue will be lost in both cases without fast and effective intervention. The cash process is crucial to ensure revenue is collected in a timely manner and that all deductions are accounted for.

Equivalent scenarios could appear in other SaaS billing scenarios–freemiums that never get paid, adding additional users on a card that eventually bounces, and so on. The chances for your revenue to vanish into thin air without an accounts receivable process are many and varied.

An ERP system with electronic invoicing can streamline the billing process, reduce the risk of human error, and help your AP department optimize cash application. Implementing a receivable system can also help manage outstanding payments and ensure timely collections, 

Receivables clarify your financial picture 

As we shared earlier, SaaS companies have been known to lose up to 10% of their revenue to poor accounts receivable management. Adding ACH to your payment options can help streamline the accounts receivable process and reduce the risk of late payments.

To help track your receivables and see how they factor into your organization’s wider financial health, use the A/R turnover ratio. It tells you what percentage of your credit-based sales end up under accounts receivable. You can find your A/R turnover ratio for a given period using the formula below: 

Average Accounts Receivable = (Initial Accounts Receivable + Final Accounts Receivable) / 2 

Reviewing and optimizing benchmarks for your metrics is essential to successful AR performance.

End-to-end AR automation software: what’s in it for you? 

As you scale, AR gets tricky. The average publicly traded SaaS organization has 35,000 customers–manual accounting grows suboptimal long before that. With the help of an AR automation solution, however, you can streamline your accounts receivable process and ensure timely payments from your customers.

What benefits do finance and accounting leaders gain when they implement accounting software with AI? 

Automated dunning emails 

Dunning emails are central to your SaaS AR workflow. When you automate the dunning process, an email will automatically be sent whenever a payment fails. You can customize your dunning emails to suit your company’s style and set up follow-up messages to ensure deliverability. 

This keeps lost revenue to a minimum, and your customers will appreciate it too. 

Enhanced real-time visibility around receivables and other metrics

Accounts receivable automation software leverages data centralization in the cloud. This means that your receivables are constantly updated in real time and accessible to anyone on your team who needs to review them. 

Your metrics are only useful if they aren’t hidden behind the walls of data silos. Automation keeps them easily accessible.

RELATED: Hidden cyber risks of financial data silos for SaaS companies

Elimination of manual financial processes 

Leaving your accounts receivable and invoicing processes on “manual mode” raises your risk of late payments or non-payment. 

Your AR process is better off automated, so your employees can devote their time to more profitable activities. 

3 pro tips for deploying accounts receivable automation software

For CFOs and other finance leaders who want to embrace automation in their departments, it helps to follow a few best practices.  

Don’t put the decision off

You should never wait for a crisis to purchase business software. Proactive CFOs think in preventative terms. 

By thinking ahead, you can avoid receivables problems rather than fix them.

Get ERP buy-in across departments 

Generating support from other stakeholders is important during any shift to automation. Paint the vision for them, and explain the benefits for everyone involved: real-time data access, continuous updates, and improved profitability across teams, to list only a few. 

Set realistic expectations for your first 90 days 

Automation isn’t a magic bullet. Diagnose your problems before making any purchases, and set goals for what you hope to achieve. 

Also, interfacing with the deployment support team for your accounts receivable automation software is a fantastic way to smooth out those first days, weeks, and months. 

Revamp your accounts receivable and SaaS finance processes today 

For SaaS CFOs and other finance leaders, an airtight accounts receivable process can make all the difference. Embracing automation contributes to a more agile finance department and allows you and your employees to offload the tedium of manual receivables management. Just as importantly, it helps teams avoid cash flow and budgeting shortfalls from large volumes of involuntary churn. 

The Modern SaaS Finance Academy features digital lessons from SaaS industry accounting experts that can help you do all that and more. You’ll learn how to turn your accounts receivable process from a manual hassle to a streamlined and automated driver of profitability and productivity. Beyond receivables, courses range from IPO prep to cutting the close, forecasting to hit your fundraising goals, and much more. Patterned off the success of the Hubspot Academy, but built for SaaS CFOs, Controllers, FP&A, RevOps, and CEOs, it is free and offers the option of CPE credits.  

Start learning today.