If all is going well in your accounts receivable department, then your company can count on healthy cash flow. That’s because an effective accounts receivable (AR) process ensures invoices are sent to clients on time and keeps track of outstanding invoices. Implementing a streamlined AR process is key to sustaining your company’s financial health—but do you know where to start?
In this guide, we’ll cover the basics of the AR process and how you can manage it in the most effective way possible.
Accounts receivables (also called trade receivables) is the amount owed to your company for providing goods or services to a customer.
Your credit sales are the funds clients owe you after you provide them with goods or services. The total amount a client owes reflects in an accounts receivable aging summary. The total amount clients owe you is reported in the balance sheet under current assets.
And even if your business hasn’t yet received the cash for an invoice, it’s still considered an asset because clients are legally obligated to pay within the agreed-upon period.
Your company provides plumbing services to 4 clients in one week. Your AR department invoices each after completing the jobs, but you only expect payment within 30 days due to your credit policy.
If payment isn’t received by the due date, the AR department contacts the client to follow up on payment. The AR department can also add charges for late payments and initiate legal proceedings for non-payment. For example, every customer except Cookies R Us paid on time and this cost them a $25 late fee.
However, remember that any late fee stipulations should be noted in your terms of service beforehand (which we’ll cover later in the AR process).
Accounts receivable represent income your business earned, but accounts payable refers to the expenses your business incurred.
Accounts receivable refers to any goods or services your business has provided on credit and expects payment within a stipulated period. Positive AR means that the account is increasing so you’re not collecting cash. In contrast, a negative AR value means that your AR balance is decreasing because cash is coming in.
Accounts payable refers to any money you owe suppliers for goods or services provided to you on credit. This increases your AP balance and your cash flow in the short term. Positive AP increases cash flow and negative AP decreases cash flow.
That’s why you want to aim for a positive AP and a negative AR balance as this means you’re paying off what you owe and collecting more cash.
Believe it or not, the AR process begins before your business delivers goods or services to clients. It starts with establishing credit terms and encouraging prompt payment and ends when funds are received and recorded.
Here’s an overview of the main steps of the accounts receivable process:
1. Providing an accurate quote for the customer: When a potential client reaches out to you, they’re usually looking for a service quote. Let’s say your plumbing business quotes $100 to fix a building owner’s tenant’s water pressure.
2. Determining the credit policy: Your business agrees with each client on what goods or services should be delivered. A clause in the agreement should state the client’s payment terms, payment method, and money owed. You should make conditions in the credit policy that stipulates interest charged for late payments and early payment discounts to encourage prompt payment.
3. Invoicing clients: After fixing your client’s water pressure, you create an invoice and send it to the client. The invoice should contain a description of the goods or services, your payment details, and the due date for payment. If changes need to be made, the AR department should rectify them immediately and resend the invoice to the client.
4. Following up on payment: An accounts receivable aging summary enables your AR department to track outstanding invoices and the period they occurred. This ledger shows overdue invoices so that the AR department knows when and who to contact to request payment. So in this example, If your client hasn’t yet paid the $100 they owe you, you may follow up as a gentle reminder.
5. Reconciling: The AR department reconciles invoices by allocating payments to the appropriate invoices. If payment hasn’t been received after the due date, the AR department needs to determine an action plan. The first step could be to send a reminder to the client, then add interest to the client’s account, followed by legal action if the debtor hasn’t paid after a certain period.
Traditionally, to track accounts receivable, the AR department would generate invoices manually using basic accounting software or paper processes. However, this stops being efficient quickly—especially for growing businesses.
That’s where automation comes in. With modern accounting software, you can automate invoice delivery and keep track of all your pending payments. You can also easily customize your payment terms, like accruing interest if payments go past due.
Still, automating the accounts receivable process helps your business record incoming payments, but it’s not suitable for all businesses. Here’s how automation may—or may not—help your business.
Efficient workflow reduces time and money
Improves invoice accuracy
Allows the AR department to focus on more important tasks
Enables your business to scale without additional staff
Can require a costly IT integration process
The cost of implementation isn’t suitable for businesses with low-volume invoices
Your growing business can increase the likelihood of receiving customer payments on time by improving how you conduct the process. Here’s what you can do to streamline your accounts receivable process and improve customer relationships simultaneously.
Manually uploading invoices is time-consuming and can lead to errors, which is frustrating for the AR team and your customers. But an automated AR process minimizes accounting mistakes and maximizes collection potential.
With automation, you can put the AR process on autopilot by creating custom templates and setting up features like recurring invoices or auto-pay. Using automation also saves time that the AR department could use to collect overdue invoices and field other tasks. Automating processes is essential for businesses today and the easier it is for customers to pay you the more likely it is that you’ll collect payment timely.
Your business needs to collect outstanding payments to maintain a healthy cash flow. Unfortunately, although every invoice should be reconciled, chasing small amounts instead of focusing on large accounts may leave your business with insufficient funds for operations.
That’s why your AR department should prioritize accounts that make up most of the accounts receivable balance—and once that’s done, you could shift your focus to other outstanding payments.
Your business needs to keep track of outstanding invoices, and one way it can do that is by allocating payment terms to each client.
An age analysis (also called accounts receivable aging) shows the outstanding period of each invoice. It’s important to know how long an invoice has been outstanding because that enables the AR department to know the stage of the collection process and the strategy to recover the outstanding amount. For example, if a payment is 30 days overdue, you may add a $25 late fee.
Processing invoices is no walk in the park, especially if you do so manually. Unfortunately, without the help of automated software, you pose significant risks that may come from human error and result in detrimental inaccuracies.
Luckily, there is good news: Reduce the time spent on invoicing clients and focus on collecting outstanding invoices by incorporating accounts receivable automation into your accounting system. The best part? Automating your AR process can also increase your business’s cash flow.
BILL’s automation software simplifies the AR process by accounting for all the goods or services delivered, ensuring that your clients receive invoices on time. Plus, debtor invoices are better managed with automatic alerts to your AR department of unpaid invoices.
Learn more about how you can get paid twice as fast with AR automation software.
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