Accounts Receivable Management (ARM) Terms by Category

 

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

Accounts Receivable Management (ARM) Terms by Category 

29 Accounts Receivable Management Terms

TermDefinition
Accounts Receivable (AR)Money owed to a company by its customers for goods or services provided on credit.
InvoiceA detailed bill listing the goods or services provided, quantities, prices, and payment terms.
Credit TermsThe payment conditions offered by a seller to a buyer.
Aging ReportA summary of accounts receivable balances by their due dates.
Days Sales Outstanding (DSO)Average number of days it takes to collect payment.
Bad DebtUncollectible accounts receivable.
Write-OffRemoving an uncollectible account from the AR balance.
Credit PolicyGuidelines for granting credit to customers.
Credit LimitMaximum amount of credit extended to a customer.
Credit BureauAgency that collects and reports information on creditworthiness.
Collection PolicyProcedures for collecting overdue accounts.
DelinquencyFailure to make a payment by the due date.
Collection AgencyThird-party company hired to collect overdue debts.
Skip TracingLocating debtors who have moved or changed their names.
Statute of LimitationsLegal time limit for collecting debts.
Accounts Receivable TurnoverMeasures how efficiently a company collects its receivables.
Cash Conversion CycleTime it takes to convert inventory into cash.
Net Realizable ValueEstimated amount of cash to be collected from AR.
Allowance for Doubtful AccountsEstimated amount of uncollectible receivables.
Bad Debt ExpenseExpense associated with uncollectible accounts.
AR SoftwareSoftware 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.
LockboxA post office box used for receiving and processing payments.
FactoringSelling accounts receivable to a third party at a discount.
Credit InsuranceProtects businesses against customer default.
Charge-offWriting off a bad debt for tax purposes.
Discount PeriodA 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:

TermDefinition
Credit PolicyThe set of guidelines a company follows when granting credit to customers.
Credit ApplicationA form filled out by a customer requesting credit.
Credit ScoreA numerical representation of a customer's creditworthiness based on their credit history.
Credit LimitThe maximum amount of credit extended to a customer.
Credit TermsThe payment conditions offered by a seller to a buyer.
Credit BureauAn agency that collects and reports information on creditworthiness.
Credit Risk AssessmentThe process of evaluating a customer's creditworthiness to determine the likelihood of default.
Credit Scoring ModelA statistical model used to predict the creditworthiness of a customer.
Credit InsuranceA type of insurance that protects businesses against customer default.
Provision for Doubtful AccountsAn estimate of the amount of uncollectible accounts receivable.

Credit and Risk Management Terms (Continued)

TermDefinition
Credit RiskThe 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 ScoringA process used to assess a customer's creditworthiness based on various factors.
Five Cs of CreditCharacter, capacity, capital, collateral, and conditions. These are factors considered when assessing creditworthiness.
Credit Bureau ReportA detailed report on a customer's credit history provided by a credit bureau.
Early Warning SystemA system used to identify potential credit problems before they become serious.
Credit MonitoringThe ongoing process of reviewing customer creditworthiness.

Credit and Risk Management Terms (Continued)

TermDefinition
CollateralAssets 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 AnalysisA report showing the age of outstanding invoices.
Collection PolicyProcedures for collecting overdue accounts.
Dunning LetterA letter sent to a customer to remind them of an overdue payment.
Charge-offWriting off an uncollectible account as a bad debt.
Write-offRemoving an uncollectible account from the AR balance.
SubrogationThe transfer of rights from one party to another. In credit insurance, it's the insurer's right to collect from the debtor.
Credit MemoA document issued to a customer for a returned product or price adjustment.
DebtorA person or entity that owes money.

Credit and Risk Management Terms (Continued)

TermDefinition
Discount PeriodA time frame during which a customer can receive a discount for early payment.
Aging BucketA grouping of invoices based on their age (e.g., 0-30 days, 31-60 days).
Collection AgencyA third-party company hired to collect overdue debts.
Statute of LimitationsThe legal time limit for collecting a debt.
Bad Debt ExpenseThe cost of uncollectible accounts written off.
Allowance for Doubtful AccountsAn estimated amount of uncollectible accounts recorded as a contra-asset.
Net Realizable ValueThe 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 TurnoverA measure of how efficiently a company collects its receivables.
Cash Conversion CycleThe time it takes to convert inventory into cash.

Credit and Risk Management Terms (Continued)

TermDefinition
Invoice DiscountingA financing option where a business sells its invoices at a discount to obtain immediate cash.
FactoringA financial transaction where a business sells its accounts receivable to a third party at a discount.
Aging AnalysisA 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 RateThe percentage of customers who stop doing business with a company within a specific time frame.
Credit Risk TransferThe 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 RiskThe risk that the other party to a contract will default on their obligations.
Basel IIA set of international banking regulations that introduced risk-based capital requirements.