Accounts receivable (AR) refers to payments owed to your business for services or products already delivered. Proper management of your accounts receivables has a significant impact on your business’s cash flow and bottom line.
There are a number of steps you can take to manage an effective AR process, and technology has introduced some new methods for increasing efficiency and effectiveness that ultimately allow business goals to be achieved.
Why Is an Accounts Receivable Process Important?
Good management of the debts owed to your company is essential, and the most obvious reason is cash flow. If your business is not effectively managing its collections, and there is a widespread and persistent problem of payments not being received on time, the business may run the risk of not having enough cash on hand to sustain its operations.
A comprehensive and consistent policy for collecting payments is also instrumental to maintaining healthy relations with your customers and upholding your business’s reputation. Having poor customer relations could affect your company’s client retention and its ability to get good deals in the future.
Likewise, being paid promptly maintains cash flow and working capital, which allows suppliers to be paid on time. This is vital for supplier relationships, to ensure that rebates or discounts are paid on time.
Finally, the strength of your accounts receivable process could impact your relations with investors and your ability to grow as a business. Cash collections, cash flow, and liquidity will have an impact on your balance sheet and your bottom line.
Investors and lenders will look to see whether your business has an effective accounts receivable process and a good track record for collecting payments as an indicator of healthy balance sheets.
Accounts Receivable Process Flow Chart
The accounts receivable process will follow a similar workflow in most organizations. These steps may vary with the size and complexity of your organization, but all AR processes follow the same simple steps:
- Initially, this begins with an interaction between the company and the customer, which results in a sale and/or delivery of a product or service
- After the transaction is made, the customer will receive an invoice from the company’s accounts receivable department
- Payment is collected from the customer within a certain period of time, typically 30 days, or in regularly defined intervals for those who are buying on credit
- Depending on the interaction, other steps may follow, such as payment reminders, late payment notices, and possible escalation or collections
- Finally, once the payment is collected or written off, the transaction is reconciled
It is one thing to understand what the process of accounts receivable entails. It is quite another to manage that process effectively.
How to Optimize Each Step of the Accounts Receivable Process
There are many steps your business can take to develop an effective accounts receivable process. Best practices can help you maximize the efficiency of your process at the most critical junctures. Take these seven steps to ensure your business has a comprehensive approach that addresses all potential issues and takes all the necessary precautions to minimize unpaid invoices.
For starters, know who you are extending credit to. Your business should exercise discretion over which customers are extended credit and the terms they receive. Not all customers will be reliable with their payments—you don’t want to extend credit to just anyone.
Develop policies that provide guidelines for determining a customer’s creditworthiness before credit is extended. Once it is granted, you’ll want to have a process in place for regularly scanning and monitoring customers to determine if any new risks have emerged. Include guidelines in your policies for how and when credit is to be repaid, including timelines and minimum amounts.
A well-managed receivable process involves good communications with your customers. Establish expectations and communicate your credit policies early, before accounts fall into arrears. You deserve to be paid on time—after all, this is what was agreed upon in your sales contract!
Learn Customer Behaviors
If payment has not been made, find out why. Some organizations do not pay until they are chased. Learn the behaviors of your key customers and find out what prompts them to pay. Establish recovery sequences to ensure all customers are prompted to pay.
A key aspect of being paid is sending customers a sales invoice for the goods or services provided in a timely and accurate manner. You can be sure that no payment is going to be made without an invoice. In some organizations, the invoice will need to be authorized by buyers or project managers, so add this into your recovery process.
It’s critical to make sure your invoice is accurate. The wrong information, such as price or order number, will automatically stop the payment process and cause a delay in receiving payment.
Maintain an Aging Process
You will also want to maintain an “aging process” to help you identify, organize, and rank outstanding payments, according to the amount of time they are outstanding. Having an effective aging process allows you to prioritize accounts, customize how you interact with accounts based on their “age,” and evaluate the financial health of your organization.
Respectfully Follow Up
After invoices are issued, follow up with your customers in a respectable manner, as needed, to maintain consistent payments. Collections and the liquidity of your receivable accounts should be monitored to ensure that cash flow is sufficient and Days Sales Outstanding are not being overextended.
All these processes and tasks will play a significant factor in ensuring your cash flow is healthy—and your profitability is maintained and not reduced because of the impact of late and non-payment of outstanding debts from customers.
How Automation Can Help
The traditional accounts receivable process entails manual “touchpoints” at every juncture along the way:
- Invoices are generated, printed, and sent, but can be slow in reaching the customer
- Debtor data is transferred into spreadsheets for monitoring collections
- Accounts receivables are manually monitored
- Data is analyzed
- Follow up to customers regarding overdue payments is performed manually
With the development of accounts receivable software, organizations can now automate many of these inefficient and time-consuming measures. This typically starts with the credit risk management process, by digitizing the ongoing evaluation of a customer’s creditworthiness.
Next, it extends to the invoicing process. Software can extract information from other platforms to digitally generate and distribute invoices to customers.
Automation can monitor and age your outstanding invoices and generate follow-up notices according to pre-defined recovery sequences. Furthermore, with a dynamic diary system, it can log actions taken and prioritize the actions required, allowing more focus and time on actions rather than working out what to do.
It can also assist your organization by digitally performing the reconciliation process for all your accounts receivables by matching customer payments to customer invoices with little or no human intervention required.
Automation is the modern solution to the needs of businesses for efficient and streamlined collection of payments due. It can save you time, improve accuracy, and reduce delays in your accounts receivables process, giving you peace of mind that your cash flows are sufficient and financials are sound. Who doesn’t want more cash?
Read this ebook to discover how to transform your AR processes with intelligent automation to increase efficiency and maximize cash flow.