How Accounts Receivable (AR) automation helps with credit risk analysis

At a time of global economic uncertainty, it’s never been more important for suppliers to be paid on-time by their customers. That’s why gaining a deeper understanding of your buyers’ creditworthiness is crucial.

A recent study by the Federation of Small Businesses (FSB) found that 52% of small businesses experience late payment delays, and 37% had applied for credit to manage their cash flow in 2022.

It’s imperative for Accounts Receivable (AR) teams to use effective processes and technologies to keep track of customer payments and identify potential credit risks in advance. In this article, we’ll explore how e-invoicing and AR analytics can help businesses perform credit risk analysis and extend the right credit terms to buyers.

The role of AR in assessing credit quality

Accounts Receivable (AR) plays a crucial role in assessing the credit quality of buyers and ensuring payments are made on time. AR teams are responsible for generating and issuing invoices for goods and services required. This includes ensuring payments are received and recorded accurately, and initiating collection efforts from buyers who fail to make payments.

One of the biggest responsibilities of an AR function is to evaluate the creditworthiness of customers before extending credit to them. They assess factors such as financial stability, payment history, and credit references to ensure they’re only extending credit to customers that are likely to pay on time.

After a customer’s creditworthiness has been examined, AR then establishes appropriate credit terms and conditions. These include setting a credit limit, agreeing payment dates, and identifying potential penalties. By setting reasonable terms, AR teams help to prevent the likelihood of delayed payments or debts.

In addition, AR functions manage the invoicing process to provide timely billings to customers, and track outstanding balances. They generate reports and conduct analysis on customers’ credit quality and identify trends in payment behavior to identify areas for improvement.

Why is credit quality becoming more of a focus for AR teams?

Right now, many businesses are feeling the squeeze as the turbulent economic climate creates a number of financial challenges. Not only has inflation risen by 4% over the past year, but many companies are seeing an increase in loan-carrying costs and experiencing a business slowdown. All this while the threat of a global recession looms.

As a result, a deeper credit risk analysis is more critical compared to previous years. Companies simply cannot afford to fall into debt due to unpaid invoices, or allocate time and resources to chasing late payments.

How can electronic AR invoicing improve cash flow?

The role of AR can be incredibly complex, with the need to connect to multiple global systems, manage relationships with a wide range of customers,  and track a high volume of payments. Without the right AR processes and technology in place, businesses could easily fall behind on payments and land in debt.

AR electronic invoicing solves these common challenges in a number of ways. For instance, investing in automated e-invoicing solutions enables AR teams to generate and deliver invoices to all buyers that accept e-invoices in near real-time – immediately after a sale, in the vast majority of cases. This reduces the time gap between service delivery and billing, encouraging customers to make timely payments which in turn improves cash flow.

Moreover, automated systems improve the accuracy and consistency of invoices, reducing errors (such as pricing or calculation errors) significantly reducing disputes or delays.

Electronic invoices also provide businesses with a clear audit trail of all payment activities, such as the time and date of every transaction. This enhances transparency  and improves credit quality by providing accurate documentation of sales – which is crucial for credit assessments.

Meanwhile, automated delivery and receipt confirmation reduces claims of non-receipt, and automated reminders improves payment adherence. These alerts and notifications also eliminate the need to spend time and money manually tracking payments. 

When it comes to assessing the credit quality of customers, the data analysis and reporting capabilities provided by e-invoicing systems can enable businesses to identify potential risks early on.

Top 5 benefits of AR analytics for assessing creditworthiness

E-invoicing systems feature robust data reporting and analytics capabilities that generate real-time insights into invoicing trends, payment patterns and Accounts Receivable metrics. 

By analyzing this data in real-time, businesses can identify customers with a higher credit risk and make data-driven decisions to enhance credit quality. Here are five ways AR analytics can help with credit risk analysis:

1. Credit limit monitoring: E-invoicing systems can track credit limits assigned to customers and provide notifications when those limits are approaching or exceeded. AR teams can closely monitor credit limits and take appropriate actions if adjustments or reviews are necessary. This helps in proactive credit risk management, ensuring that credit exposure is controlled within acceptable levels.
2. Historical transaction analysis: E-invoicing systems store historical transaction data, which can be used to discover patterns and trends. AR teams can analyze customer payment behavior over time to evaluate credit risk. This includes looking at payment punctuality, frequency of late payments, or historical delinquencies, to provide AR teams with insights into the creditworthiness and reliability of customers.
3. Recent transaction data: As well as looking at historic payment history, e-invoicing systems also capture and store data in real-time to provide AR teams with immediate access to up-to-date information. This instant availability of data allows for more accurate credit risk analysis and allows AR teams to assess the creditworthiness of customers based on the most recent transaction data and overall financial position.
4. Credit scoring models: With the data collected through e-invoicing systems, AR teams can develop credit scoring models and segment customers based on their credit risk levels. By assigning scores or ratings to customers, teams can prioritize their efforts and allocate resources accordingly. This segmentation helps in managing credit risk effectively by focusing more attention on high-risk customers while providing appropriate credit terms to low-risk customers.
5. Customized reporting: E-invoicing systems offer customizable reporting features, allowing AR teams to generate reports tailored to their specific credit risk analysis needs. Teams can define and track key credit metrics, such as Days Sales Outstanding (DSO), aging of receivables, or customer payment trends. Customized reports facilitate in-depth analysis, monitoring credit quality, and making informed credit decisions.

Enhance AR automation and improve credit control with Tungsten Network

As a global leader in e-invoicing solutions, Tungsten Network is helping the world’s suppliers go digital. We can help you achieve true invoicing automation, gain 100% visibility of invoice data, monitor your cash flow and track customer payments, and gain a complete view of your outbound billing in a single system.

To learn more, read more on our AR e-invoicing solutions here, or book a demo today.