Glossary

What is the Accounts Receivable Process?

When running a business, there are typically a number of tasks that have to be juggled at once: managing your employees, marketing your product or service, and of course, invoicing customers to make sure you are getting paid for your work. How you send the invoices to your clients or customers, track outstanding invoices, and receive payments is the accounts receivable process, and it is an integral part of any business. We’ll delve into how the accounts receivable process works below.

What is Accounts Receivable?

Accounts receivable (AR or A/R) is the funds your clients or customers incurred for the goods or services you've provided to them. You'll need to bill your clients or customers with invoices, outlining what you're charging them for and for how much. It’s similar to what some people call an IOU, and can be managed through a workflow process detailing how much is owed, when it’s due, and who has or hasn’t paid.

For example, you can think of accounts receivable in terms of paying for your internet use. Throughout the month, you use data from your internet provider. Once the month is over, your internet provider will bill you for the data it provided you throughout the month. When the internet provider sends you a monthly statement or electronic invoice, it will include how much data you've used for the month. Typically, internet providers charge a fixed fee for their services, but may charge extra fees if you go over the data limit. What you owe at the end of the month is considered accounts receivable.

Similarly, many businesses operate by offering their customers and clients the option to pay after receiving their goods or services, and that creates a receivable. The amount of money owed by the customer for purchases paid in credit is the accounts receivable, and it's listed on the balance sheet as an asset. By implementing an effective accounts receivable process such as using automated invoice processing software, you can establish a steady cash flow which can help your business thrive.

Four Main Steps for a Typical AR Process

While every business has their own approach to an accounts receivable process, there are four common steps that typically make up an invoice process flow.

1. Establishing terms 

Once you start to garner customers, both parties will need to agree on the product or service being offered. It's important to establish credit practices so that your company can decide whether you will offer a customer credit sales. Having a credit application process in place to help determine the credit worthiness of your customers and establish credit terms to outline the customers' obligations and requirements. During that process, you may also establish payment terms with your client such as payment due dates and late fees. If you manage a larger business, you may be able to afford to allow a longer amount of time for the clients to fulfill a payment. When running a small business, however, it may be more financially difficult for you to agree to far out due dates as you may need a quicker turnaround to avoid cash flow problems.

2. Invoicing your customer

Once your client receives the services or goods you promised, your accounts receivable department will need to send the client an invoice. An invoice should relay information such as a breakdown of the charges, expected payment date(s) and your contact information. Invoices can be sent via mail, email, or sent through an automated invoice processing software. These types of programs can automate sending your invoices, track the progress of your invoices, and send payment reminders to clients.

3. Tracking and receiving payments

Once you’ve sent your customers their invoices, you’ll need to have a way to track and manage them so you know who has paid you and who hasn’t. Typically, clients have 30 days to pay an invoice, generally starting from the day the invoice is sent. Invoice automation technology can help you track this and even follow up with clients when they get close to the payment due date.

4. Reconciling paid and unpaid invoices

Once the payment date arrives, hopefully the customer or client will have paid you by then. If this is the case, then you’ll need to record that the invoice is paid. You can do this through your collections database.

If a due date has passed, this is considered a late payment. When this happens, you’ll need to have a clear plan of action on the collection process for late payments going forward. You’ll need to decide on details such as late fees and when the overdue payment becomes bad debt. For example, if a client’s payment is 30 days late, you might charge them a $50 late fee. If it is 60 days overdue, you might charge them a $100 late fee. After 90 days, you might charge them a late fee of $150 and send the information to a collection agency, a company that will contact the client to track down the late payment.

Overdue invoices can have a negative impact on your business’s cash flow, so you’ll want to be on top of collecting and tracking which customers have paid and which haven’t.

Accounts payable vs accounts receivable

Another term that is often used when tracking cash flow in a business is accounts payable (AP or A/P). This is the amount of money that you owe to other creditors for supplies and services you use to operate your business. They typically include payment terms, and, in order to pay your accounts payable, you’ll need your customers to pay accounts receivable.

Simply put, accounts payable will decrease your company’s cash flow while accounts receivable will increase it. The two concepts are an interconnected part of the accounting process, and, if you mix the two up, you could come up with a negative balance.

When putting together your business’s balance sheets and financial reports — statements that demonstrate your business’s financial performance — accounts payable and account receivable will be included in both. However, accounts payable will be classified as current liabilities and accounts receivable will be labeled as current assets.

Where to start

Tracking your accounts receivable can be an intricate task. Having an efficient workflow and technology can make managing your accounts much more streamlined, freeing up your time to perform other tasks for your business. Reliable accounts receivable automation services can help eliminate human error that can throw a wrench into your finances by making simple mistakes during the accounting process.

Errors, even small ones, can end up costing you more money in the long run. Get ahead of this by signing up for a Bill.com trial and learning about features such as setting up recurring invoices for regular customers, automated reminders for customers to pay their invoice, and syncing up all of your accounts. Bill.com also syncs with many accounting software such as QuickBooks. Optimize your receivable management today!

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