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 you send invoices to clients on time and keep 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.
What is the accounts receivable process?
Accounts receivables (also called trade receivables) are the amount owed to your company for providing goods or services to a customer on credit.
Your credit sales are the funds clients owe you after you provide goods or services. An accounts receivable aging summary report reflects the total amounts clients owe. You’ll also find your total accounts receivable balance in the balance sheet under current assets.
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.
An example of accounts receivable
Your company provides plumbing services to four clients in one week. Your AR department invoices each after completing the jobs, but your credit policy gives clients 30 days to pay the invoice.
If you don’t receive payment 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 send the account to a collection agency for non-payment. In the above example, every customer except Cookies R Us paid on time and this cost them a $25 late fee.
Remember, you should outline any late fee stipulations in your credit terms before allowing customers to purchase goods or services on credit. We’ll explain credit terms in more detail later in the AR process).
Accounts receivable vs. accounts payable
Accounts receivable represent income your business earned, but accounts payable refers to the expenses your business incurred.
Take a look at BILL's page on accounts receivable vs. accounts payable for a more in-depth look at the differences.
Steps in the accounts receivable process
Believe it or not, the AR process begins before your business delivers goods or services to clients. It starts with establishing credit terms to encourage prompt payment and ends when you receive the funds and record the cash in your books.
Here’s an overview of the main steps of the accounts receivable process:
1. Provide 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. Establish a credit policy: Your business agrees with each client on what goods or services you will deliver. A written credit agreement should state the client’s payment terms, payment method, and money owed. Include conditions in the credit policy to stipulate interest or late fees charged for late payments and early payment discounts to encourage prompt payment.
3. Invoice 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 payment due date. If you need to change the invoice, the AR department should rectify it immediately and resend the invoice to the client.
4. Follow up on payment: An accounts receivable aging summary helps your AR department track outstanding invoices, including the date sent and the due date. This ledger shows overdue invoices so 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. Reconcile payments and invoices: The AR department reconciles invoices by allocating payments to the appropriate invoices. If you haven’t received payment by 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 sending the invoice to collections if the debtor hasn’t paid after a certain period.
Traditional accounts receivable processes vs. modern-day automation
To track accounts receivable, the AR department traditionally generates 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.
Automating the accounts receivable process helps your business record incoming payments, but it isn’t suitable for all businesses. Here’s how automation may—or may not—help your business.
Pros
- 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
Cons
- Can require a costly IT integration process
- The cost of implementation isn’t suitable for businesses with low-volume invoices
How to design an efficient accounts receivable process
Your growing business can increase the likelihood of receiving customer payments on time by improving how you handle accounts receivable. Here’s what you can do to streamline your accounts receivable process and improve customer relationships simultaneously.
Option #1: Automate the AR process
Manually creating invoices is time-consuming and leads to data entry errors, which is frustrating for the AR team and your customers. 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 handle other tasks. The easier it is for customers to pay you, the more likely you are to collect timely payments.
Option #2: Collect essential invoices first
Your business needs to collect outstanding payments to maintain a healthy cash flow. Unfortunately, although you should reconcile every invoice, 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. Once you collect your highest-value receivables, you can focus on other outstanding invoices.
Option #3: Segment invoices
You need to keep track of outstanding invoices, and one way to 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. Knowing how long an invoice has been outstanding lets the AR department know the stage of the collection process and the strategy to recover the outstanding amount. For example, if a payment is 1 day overdue, you might call the customer to remind them. Once it’s 30 days overdue, you may add a $25 late fee.
Guarantee a successful accounts receivable process with BILL’s automated software
Processing invoices is no walk in the park, especially if you handle them manually. Unfortunately, without the help of automated software, you run the risk of human error and unhappy customers.
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 you deliver, ensuring your clients receive invoices on time. Plus, you’ll have better visibility into late invoices with automatic alerts to your AR department of unpaid invoices.
Learn more about how to get paid twice as fast with AR automation software.
