Accounts Receivable Management (ARM) Terms by Category

 

Accounts Receivable Management (ARM)

Accounts Receivable Management (ARM) is the systematic process of monitoring and controlling the money customers owe to a business for goods or services purchased on credit. It involves a series of steps to ensure timely payment, minimize bad debts, and optimize cash flow.

Key Components of ARM

• Credit Policy: Establishing clear credit terms, credit limits, and collection procedures.
• Invoicing and Billing: Generating accurate and timely invoices with clear payment instructions.
• Payment Processing: Efficiently handling various payment methods (checks, credit cards, electronic payments).
• Customer Communication: Maintaining open communication with customers regarding outstanding balances and payment due dates.
• Collections: Implementing effective collection strategies to recover overdue payments.
• Credit Analysis and Risk Assessment: Evaluating customers' creditworthiness to minimize bad debt.
• Reporting and Analysis: Tracking key metrics (aging reports, DSO, bad debt expense) to measure performance.

Importance of ARM

Effective ARM is crucial for a business's financial health for several reasons:

• Improved Cash Flow: Timely payments ensure a steady cash flow, allowing for operational expenses and growth investments.
• Reduced Bad Debt: Proactive credit management and collections minimize the risk of uncollectible debts.
• Enhanced Customer Relationships: Clear communication and efficient payment processes can improve customer satisfaction.
• Data-Driven Decision Making: Analyzing AR metrics provides valuable insights for business strategies.

Challenges in ARM

• Late Payments: Customers delaying or missing payment deadlines.
• Bad Debts: Customers unable or unwilling to pay outstanding balances.
• Manual Processes: Inefficient and error-prone manual data entry and processing.
• Customer Disputes: Disagreements regarding invoices or payments.

Best Practices for ARM

• Clear and Consistent Communication: Maintain open lines of communication with customers.
• Automated Processes: Utilize technology for efficient invoicing, payment processing, and collections.
• Creditworthiness Assessment: Evaluate customers' creditworthiness before extending credit.
• Aging Analysis: Regularly monitor outstanding invoices to identify potential issues.
• Customer Segmentation: Tailor collection efforts based on customer behavior and payment history.
• Early-Stage Collections: Implement proactive collection strategies to prevent delinquency.
• Data Analytics: Use data to identify trends, improve processes, and make informed decisions.

Accounts Receivable Management (ARM) Terms by Category 

29 Accounts Receivable Management Terms

Term	Definition
Accounts Receivable (AR)	Money owed to a company by its customers for goods or services provided on credit.
Invoice	A detailed bill listing the goods or services provided, quantities, prices, and payment terms.
Credit Terms	The payment conditions offered by a seller to a buyer.
Aging Report	A summary of accounts receivable balances by their due dates.
Days Sales Outstanding (DSO)	Average number of days it takes to collect payment.
Bad Debt	Uncollectible accounts receivable.
Write-Off	Removing an uncollectible account from the AR balance.
Credit Policy	Guidelines for granting credit to customers.
Credit Limit	Maximum amount of credit extended to a customer.
Credit Bureau	Agency that collects and reports information on creditworthiness.
Collection Policy	Procedures for collecting overdue accounts.
Delinquency	Failure to make a payment by the due date.
Collection Agency	Third-party company hired to collect overdue debts.
Skip Tracing	Locating debtors who have moved or changed their names.
Statute of Limitations	Legal time limit for collecting debts.
Accounts Receivable Turnover	Measures how efficiently a company collects its receivables.
Cash Conversion Cycle	Time it takes to convert inventory into cash.
Net Realizable Value	Estimated amount of cash to be collected from AR.
Allowance for Doubtful Accounts	Estimated amount of uncollectible receivables.
Bad Debt Expense	Expense associated with uncollectible accounts.
AR Software	Software for managing accounts receivable processes.
Customer Relationship Management (CRM)	Software for managing customer interactions and data.
Electronic Data Interchange (EDI)	Electronic exchange of business documents.
Automated Clearing House (ACH)	Electronic transfer of funds between banks.
Lockbox	A post office box used for receiving and processing payments.
Factoring	Selling accounts receivable to a third party at a discount.
Credit Insurance	Protects businesses against customer default.
Charge-off	Writing off a bad debt for tax purposes.
Discount Period	A period when customers can receive a discount for early payment.

Let's Focus on Credit and Risk Management

Credit and risk management is a crucial aspect of accounts receivable management. Here are some key terms and definitions:

Term	Definition
Credit Policy	The set of guidelines a company follows when granting credit to customers.
Credit Application	A form filled out by a customer requesting credit.
Credit Score	A numerical representation of a customer's creditworthiness based on their credit history.
Credit Limit	The maximum amount of credit extended to a customer.
Credit Terms	The payment conditions offered by a seller to a buyer.
Credit Bureau	An agency that collects and reports information on creditworthiness.
Credit Risk Assessment	The process of evaluating a customer's creditworthiness to determine the likelihood of default.
Credit Scoring Model	A statistical model used to predict the creditworthiness of a customer.
Credit Insurance	A type of insurance that protects businesses against customer default.
Provision for Doubtful Accounts	An estimate of the amount of uncollectible accounts receivable.

Credit and Risk Management Terms (Continued)

Term	Definition
Credit Risk	The probability of financial loss due to a customer's failure to repay a debt.
Probability of Default (PD)	The likelihood of a customer failing to meet their debt obligations.
Loss Given Default (LGD)	The estimated loss incurred if a customer defaults.
Exposure at Default (EAD)	The amount of money a lender could potentially lose if a borrower defaults.
Expected Loss (EL)	The estimated credit loss a lender can expect to experience. Calculated as PD * LGD * EAD.
Credit Scoring	A process used to assess a customer's creditworthiness based on various factors.
Five Cs of Credit	Character, capacity, capital, collateral, and conditions. These are factors considered when assessing creditworthiness.
Credit Bureau Report	A detailed report on a customer's credit history provided by a credit bureau.
Early Warning System	A system used to identify potential credit problems before they become serious.
Credit Monitoring	The ongoing process of reviewing customer creditworthiness.

Credit and Risk Management Terms (Continued)

Term	Definition
Collateral	Assets pledged by a borrower to secure a loan.
Debt Service Coverage Ratio (DSCR)	A measure of a borrower's ability to meet debt obligations.
Aging Analysis	A report showing the age of outstanding invoices.
Collection Policy	Procedures for collecting overdue accounts.
Dunning Letter	A letter sent to a customer to remind them of an overdue payment.
Charge-off	Writing off an uncollectible account as a bad debt.
Write-off	Removing an uncollectible account from the AR balance.
Subrogation	The transfer of rights from one party to another. In credit insurance, it's the insurer's right to collect from the debtor.
Credit Memo	A document issued to a customer for a returned product or price adjustment.
Debtor	A person or entity that owes money.

Credit and Risk Management Terms (Continued)

Term	Definition
Discount Period	A time frame during which a customer can receive a discount for early payment.
Aging Bucket	A grouping of invoices based on their age (e.g., 0-30 days, 31-60 days).
Collection Agency	A third-party company hired to collect overdue debts.
Statute of Limitations	The legal time limit for collecting a debt.
Bad Debt Expense	The cost of uncollectible accounts written off.
Allowance for Doubtful Accounts	An estimated amount of uncollectible accounts recorded as a contra-asset.
Net Realizable Value	The estimated amount of cash to be collected from accounts receivable.
Days Sales Outstanding (DSO)	Average number of days it takes to collect payment.
Accounts Receivable Turnover	A measure of how efficiently a company collects its receivables.
Cash Conversion Cycle	The time it takes to convert inventory into cash.

Credit and Risk Management Terms (Continued)

Term	Definition
Invoice Discounting	A financing option where a business sells its invoices at a discount to obtain immediate cash.
Factoring	A financial transaction where a business sells its accounts receivable to a third party at a discount.
Aging Analysis	A report showing the age of outstanding invoices, typically categorized into buckets (e.g., 0-30 days, 31-60 days).
Customer Lifetime Value (CLTV)	The total revenue a business can expect from a customer over their lifetime.
Customer Acquisition Cost (CAC)	The cost of acquiring a new customer.
Customer Churn Rate	The percentage of customers who stop doing business with a company within a specific time frame.
Credit Risk Transfer	The process of shifting credit risk to a third party, often through instruments like credit default swaps.
Credit Default Swap (CDS)	A financial contract that transfers credit risk from one party to another.
Counterparty Risk	The risk that the other party to a contract will default on their obligations.
Basel II	A set of international banking regulations that introduced risk-based capital requirements.

Frequently Asked Questions About Accounts Receivable Management (ARM)

Accounts Receivable Management (ARM) is the process of effectively managing a company's outstanding invoices from customers. It involves tracking, collecting, and ensuring timely payment of these invoices.

Basic Concepts

• What is Accounts Receivable Management? It is the process of managing a company's outstanding invoices from customers.
• Why is it important? Effective ARM helps improve cash flow, maintain customer relationships, and reduce bad debt.

Key Processes

• Invoice Generation: How are invoices typically generated?
  • Automatically through accounting software
  • Manually by sales teams
• Customer Credit Checks: Why are customer credit checks important?
  • To assess creditworthiness and manage risk
• Aging Analysis: What is aging analysis and how is it used?
  • To track the age of outstanding invoices and identify overdue payments
• Collections: What are effective collection strategies?
  • Polite and persistent follow-ups
  • Offering payment plans or discounts
  • Legal action (if necessary)

Challenges and Best Practices

• Common Challenges: What are some common challenges in ARM?
  • Late payments
  • Invoice disputes
  • Bad debt
• Best Practices: What are some best practices for ARM?
  • Set clear credit policies
  • Provide timely invoices
  • Offer multiple payment options
  • Monitor performance

Technology and Automation

• ARM Automation: How can technology improve ARM processes?
  • Streamline invoice generation and tracking
  • Automate follow-ups
  • Improve cash flow forecasting
• ARM Software: What are some common ARM software features?
  • Customer relationship management (CRM) integration
  • Automated collections
  • Credit scoring
  • Aging reports

Additional Considerations

• Bad Debt: How can companies manage bad debt?
  • Write off uncollectible debts
  • Use factoring services
  • Implement credit insurance