There are many reasons to start a business, but all business owners share the desire to be profitable. Companies of all sizes must maintain a positive cash flow, and your accounts receivable (AR) personnel play a critical role in ensuring that money owed by customers is received on time. By any stretch of the imagination, this is not a simple task.
Accounts receivable can be thought of as an IOU in its most basic form. For example, the electricity used by your company is invoiced at the end of the service period. Although you have already used the electricity, payment is made in arrears.
Customers mostly pay by the due date, but an organization’s financial health can quickly deteriorate without the proper accounts receivable process in place.
This article is a guide on all you need to know about the accounts receivable process.
Table of Contents
- What is the Accounts Receivable Procedure?
- Traditional Accounts Receivable Vs. Modern-Day Automation
- Pros and Cons of the Accounts Receivable Process
- Should you automate the accounts receivable process?
- Tips To Create A Flawless Accounts Receivable Process
- Account Receivable Process- Step by Step Guide
- Step 1- Establish credit practices
- Step 2- Invoice customers
- Step 3 – Track accounts receivable
- Step 4 – Accounting for accounts receivable
- Step 5 – Compliance with Consumer Credit Laws
- Step 6- Send Out Invoices
- Step 7- Log All Charges and Expenses in Real-time
- Step 8- Incentivize Early Payment Discounts
- Step 9- Build and Maintain Customer Relationships
- Frequently Asked Questions
- Conclusion
- References
- Recommendations
What is the Accounts Receivable Procedure?
The accounts receivable process brings cash into the business through invoicing and the collection process, which brings payments in from goods or services sold.
The goal of this business process is to bring cash into the business before invoices become past due or bad debts, resulting in a healthy cash flow to support business growth and profitability.
Traditional Accounts Receivable Vs. Modern-Day Automation
The traditional approach to accounts receivable has been to manually generate invoices in batches, sometimes daily, from accounting software or even excel spreadsheets.
These invoices were then printed and posted, or, more recently, emailed or sent via other electronic means. Typically, this method relied on a manual process to verify payments and identify outstanding invoices for follow-up.
The modern approach to accounts receivable takes the output from ERP systems or accounting software and routes it through an invoicing platform, such as Corcentric EIPP, to automate invoice delivery.
Invoices can be sent via post, email, or a variety of other electronic delivery methods such as EDI or XML using modern invoice automation platforms.
Electronic invoices streamline the payment process and provide the seller with real-time visibility into the payment status. This is accomplished by embedding links to payment options, such as direct debit, credit card, and other online payment methods, in the invoice.
Pros and Cons of the Accounts Receivable Process
Even though the accounts receivable process has advantages, it has its disadvantages as well. They are-
Pros
- Workflow optimization saves time and money.
- Improved invoice content and delivery accuracy
- Ease of reporting status and real-time insight
- Scale up or down without worrying about headcount or training issues.
- Allow the AR team to concentrate on higher-level tasks that require a human touch.
Cons
- If approached as an internal project, it may cause extensive/expensive IT involvement.
- Unless properly managed, there is a risk of disruption in invoicing and collection flow.
- Time/cost must be weighed against savings – does not work well with small numbers of invoices.
- Some solutions may restrict your ability to send invoices to specific content/formats/networks.
Should you automate the accounts receivable process?
If the volume and complexity of your invoicing consume too much time, consider automating this business process to free up resources for more valuable work. However, selecting the right solution or solution partner causes careful consideration.
Many accounts receivable automation solutions cause a significant amount of setup and configuration time. A managed service solution, such as Corcentric EIPP, is an alternative in which the technical complexity is outsourced to deliver on a specific set of business outcomes that are aligned with your AR process needs.
Invoice automation solutions also improve invoice content and delivery information accuracy. By obtaining data directly from an ERP system or accounting software, you eliminate the possibility of copy-paste or other production errors.
Tips To Create A Flawless Accounts Receivable Process
A flawless AR process necessitates careful attention to detail and the scalability and accuracy provided by AR automation. The tips to ensure this is possible are-
- Customers should be able to receive invoices and follow-up communications in the format of their choice across multiple media.
- Consider using templates to ensure that all necessary details, such as purchase orders and other order information, are included.
- Communications should maintain a personal touch while also making it simple for buyers to request additional information or assistance as needed. Handling exceptions before they have an impact on cash flow is critical to success.
- Invoices are possibly the most ignored communication that businesses send, so make sure they express your brand values in both presentation and ease of use.
- Streamline the payment process and make it easier for customers to access their invoicing and statement history.
- Everything in your accounts receivable process should be perfectly timed, accurate, and simple to respond to. Furthermore, you should have complete visibility into the location of every communication and payment, as well as an understanding of where cash flow risks are likely to arise before they occur.
Account Receivable Process- Step by Step Guide
Here are the key accounts receivable steps that you should take-
Step 1- Establish credit practices
This first step is determining their credit worthiness in order to eliminate customers who are unlikely to pay you for the services or products delivered. To do so, you must first create a credit application process. This process appears to be simple, but there are several steps involved, including:
- Decide how much credit you want to extend to customers.
- Determine the payment period.
- Determine whether you want to offer early payment discounts and, if so, the percentage of the discount.
- Determine the late payment penalties.
- Determine any additional conditions that are unique to your company or industry.
After determining the credit terms and conditions, consider the following:
- If a current customer, how long have they been a customer?
- What is the current customer’s payment history?
- What are your competitors’ credit terms?
- What is the state of your cash flow?
With this in place, you’ll need a method to assess the creditworthiness of current and prospective customers. This is usually accomplished through a credit check. To conduct a credit check, you must do the following:
- Obtain the customer’s signed authorization.
- Obtain their full legal name, birth date, and social security number.
- Use one of the top three credit bureaus – Equifax, Experian, or TransUnion.
Step 2- Invoice customers
To avoid confusion and late payments during the accounts receivable process, invoices must communicate transactional information and contain the following:
- A distinct invoice number.
- Specifics about the products and/or services provided.
- The price of the goods and/or services.
- Payment terms and the date payment is due
You should also give customers the option of receiving paper or electronic invoices. Electronic invoices are more convenient, provide faster delivery, and are less expensive. Cloud-based software that automates invoice processing will reduce manual efforts and increase first-time billing accuracy to keep your invoicing processes on track, consistent, and accurate.
Further reading: Accounts Payable Clerk Job Description Template for 2023
Step 3 – Track accounts receivable
It is critical to keep track of what is owed in order to ensure long-term profitability. Invoices that have yet to be paid must be recorded in an accounts receivable ledger.
Essentially, this is a list of invoices with outstanding balances. To ensure accuracy, double-check that the total balance due matches the total accounts receivable on your balance sheet.
A cloud-based software solution allows you to automate the entire process – payments, credits, refunds, and dunning – to reduce manual effort and the possibility of errors.
Step 4 – Accounting for accounts receivable
There are two accounting methods for receivables: cash-basis accounting and accrual-basis accounting. Regardless of the method, make certain that all transactions are accurately recorded and accounted for. To do so, use your invoices to document accounts receivable, describing the products and/or services provided, the amount owed, and the due date.
Whether customers pay with cash or checks, the accounts receivable processes you implement must manage payment verification and risks.
Step 5 – Compliance with Consumer Credit Laws
There are laws in place to protect consumers and their credit. The Federal Trade Commission (FTC) enforces consumer protection laws and ensures that customers are fully informed about a company’s credit practices.
To ensure that a business complies with consumer credit laws, the following guidelines should be followed:
- Communicate the interest rate clearly.
- Respond to all billing errors within a certain time frame.
- Adhere to all debt collection regulations.
- Visit the FTC to stay up to date on debt collection laws.
- Look into the Fair Debt Collections Practices Act and consumer equal credit opportunity rights for more information on FTC regulations.
Step 6- Send Out Invoices
The following step is to decide how you will bill customers. The importance of digitizing processes grows with the size of the business. A high volume of clients with a wide range of needs and payment methods can lead to misunderstandings and errors.
An invoice, whether paper or digital, must include specific information that identifies the customer and the goods or services provided. It should include the following information:
- A distinct invoice number
- The date is prominently displayed.
- Both parties’ business names and addresses
- A detailed description of the service/product offered
- The total amount owed
- Due date for payment
Step 7- Log All Charges and Expenses in Real-time
Every charge must be recorded in real time. AR software should be capable of scanning orders, receipts, and requests as soon as they arrive. Any corresponding documents required for invoice processing should be uploaded and paired with the appropriate documents.
Step 8- Incentivize Early Payment Discounts
Getting payments in on time is one of the most difficult aspects of the accounts receivable process. The goal is to secure cash in a timely and consistent manner. Some customers simply require a little encouragement, which can be provided in the form of early payment discounts.
This can be printed directly on the invoice or incorporated into the business contract. Not every customer has a strong enough cash flow to make it work, but businesses that accept these discounts typically pay early and consistently.
Step 9- Build and Maintain Customer Relationships
Maintaining strong customer relationships is one of the best-kept secrets of a successful accounts receivable process. The greater your customers’ appreciation for your company, the more likely it is that you will be paid on time.
This begins with consistent, friendly contact. The more familiar an AR team is with a company’s AP team, the easier the collections process becomes. Your business processes should always be centered on the customer and maintaining a high level of satisfaction.
Must Read: 30 Must-have Skills For Customer Service Representatives
Frequently Asked Questions
Accounts receivable (AR) is the amount owed to a company for goods or services delivered or used but not yet paid for by customers. Accounts receivable are classified as a current asset on the balance sheet. AR is any amount of money owed by customers for credit purchases.
A maker of furniture who has supplied furniture to a retail business is an example of an account receivable. Payment due is noted under accounts receivable once the manufacturer bills the retailer for the furniture. The maker of the furniture is awaiting payment from the retailer.
Trade accounts receivable, notes receivable, and other accounts receivable are the three categories into which receivables are often broken down.
In the business’s accounting ledger, accounts receivable are viewed as assets since they can be quickly transformed into cash. Instead, the company has given the client credit and anticipates getting paid for the transaction at a later date.
The ability to create a customer invoice and post a payment receipt is at the heart of SAP ERP FI’s Accounts Receivable module. It’s entirely up to you, but the process will ensure that you keep track of everything.
Receivables from customers are an asset, not a burden. Assets are items you possess, but liabilities are things you owe to other people. Accounts receivable is not regarded to be equity because equity is the difference between the two.
Conclusion
The accounts receivable department manages revenue flow through invoicing and collection. The goal of this business process is to provide healthy cash flow to support business growth and profitability, from credit application to invoicing, follow-up, and debt collection of late payments.
References
- fool.com– The blueprint account receivable
- corcentric.com– The account receivable process- step by step guide
- tipalti.com– Account receivable cycle
- tipalti.com– Account receivable process
- avidxchange.com Account receivable processes
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