Collecting cash from your customers is an important facet of running a business. Many business owners insist on managing their AR internally where it can be kept away from prying eyes, but is there a cost to keeping accounts receivables in-house? Is there more value in outsourcing accounts receivables? Let’s break down the value proposition when you outsource accounts receivables and the risks inherent to doing so.
In economics, the division of labor, also called “specialization”, refers to the separation of tasks in a process into more manageable parts which are assigned to those who are most effective at the task. The division of labor is also critical in businesses. It is why your CEO doesn’t spend their time writing email newsletters and your HR team doesn’t build your products. Each member of your staff should be primarily assigned the tasks that they are most effective at completing, and the same is true when you outsource.
Reducing Costs: Outsourcing your accounts receivables or other accounting tasks can reduce costs associated with staff salaries, training, and software costs.
Increasing Scalability: When working with a 3rd party for your AR, they are more capable of handling increased volumes than your internal team with their existing tasks.
Improved Cash Flow: If you do not have an internal AR specialist, outsourcing your accounts receivable places an experienced professional firm in place to leverage their efficient systems and improve cash flow.
Keep Your Team Focused: Outsourcing accounts receivables can allow your internal team to focus on what you do best rather than needing to allocate time and other resources to manage your receivables.
Protect Customer Relationships: No one likes being told to “pay up”, so by outsourcing your AR you can avoid some of the strain on customer relationships that are likely to occur during these conversations.
Compliance and Technology: Firms that handle AR/AP and other accounting tasks are well- versed in finance compliance and often have access to effective technology that helps in payment collection.
As you can see, there are some compelling benefits to outsourcing your accounts receivables to a third party. Like with all outsourcing opportunities, an efficient team contracted to perform a specialized task can save your business money and improve the effectiveness of your entire operation. It is important, however, to properly vet any professional firms to ensure they fit your needs and are as professional as they seem to be.
Like all business decisions, the choice to outsource a sensitive element like AR does not come risk-free. Every business has its own style and its own needs, and finding the right firm to contract with is critical to ensuring success. For many businesses, the potential risks may not outweigh the potential value. Here are some risks associated with outsourcing accounts receivables.
Less Visibility: When you outsource your AR the processes you and your team are familiar with may not be as visible within your third-party firm. You will likely have less day-to-day visibility on where your AR stands and will rely on your outsourced team for data.
Cost Variation: Your fees from the professional firm may vary depending on your terms and the number of accounts in AR. This could make it more difficult to predict expenses month over month.
Integration: Depending on the firm you choose to work with you may run into integration issues as the software does not always take kindly to one another and processes can differ greatly between different businesses.
Dependency: Even when your outsourced accounts receivables are doing well, you have increased your dependency on a third party for an essential aspect of the business. Whether they are more dependable than hiring staff internally is, of course, a worthy debate.
AR Turnover Rate: how often accounts receivables are collected during a period.
Aging Schedule: a breakdown of receivables by length of time they have been outstanding.
As is typical in business, this question is answerable only on a case-by-case basis. For many companies, outsourcing your Accounts Receivables to a trusted third party opens up your staff to more meaningful and specialized tasks. Division of labor works, and is the modus operandi of the entire world. However there are plenty of businesses that find a quality, specialized staff member who allows them to maintain tight control of their AR while avoiding the challenges associated with outsourcing this sticky subject. For those companies, so long as that employee sticks around and maintains their work ethic, they may be in good shape for decades to come.
Only you know what is best for your business at the end of the day, but if you haven’t considered it yet… now is better than yesterday to consider outsourcing accounts receivables.
