For any organisation, accounts receivable or AR is the outstanding balance of money or invoices that its customers owe. It’s essentially an IOU. While the accounts receivable process is beneficial for any business, it comes with its problems.

Therefore, it’s important for companies to devise a robust strategy to mitigate the risks associated with their accounts receivable function. This article will give insights into accounts receivable and how you can create a substantial account receivable process.

What is An Accounts Receivable?

An accounts receivable is the amount yet to be collected from customers, even though sales have been made to them. Some companies operate by allowing the customers to receive the product or benefits on credit and pay after receiving the service.

This is very common for utility companies providing services such as electricity, telephone, or internet. Here, the customer pays for the services after using them. In instances where a company awaits payment for services that have already been supplied and used, the unpaid invoices are known as accounts receivable.

Accounts Receivable Process Workflow

When the billing cycle is complete, an accounts receivable process initiates when a customer purchases the product or service and utilizes it, only to make the payment later. The customer continues doing so until they decide they no longer want to do business with you.

The Process Flow of Accounts Receivable is Mentioned Below-

1. Sale or Delivery This is the step where the customer receives the delivery of a service or a product as a result of interaction with the company.

2. Invoice The accounts receivable department then sends the invoice to the customer.

3. Payment collection

After the customer gets the invoice, he has around 30 days to make the payment.

4. Reconciliation This process begins again once the payment for the previous month or order has been collected.

Some Other Steps Involved Might Include-

● Sending payment reminders in-between the month.

● Sending reminders for late payment.

● Escalating the matters of late payment.

10-Step Accounts Receivable Process

Some businesses have an accounts receivables process in place already but have not introduced a strategy to ensure their success. Therefore, we have developed a step-by-step process for account receivables to make it effective and profitable for organisations.

1. Determine the Eligibility And The Source Of Credit Extension.

You should devise a strategy to determine how you will collect the receivables from the customer. At this stage, you should also decide who is eligible for this scheme. For example, some organisations run a credit check to see if the applicant is creditworthy or not.

To check this, they take necessary details such as the customers' names, contact information, employment information, address history and social security number. For businesses, data such as the contact details of the AR department or references from other companies that have extended credit must be taken.

2. Create a Plan for Collection This step includes deciding upon the method of collection of receivables, whether it has to be done weekly, monthly or yearly etc.

To make this plan airtight, you should create a business agreement while considering factors such as AR cash flow, payment history of the customer, industry standards etc. Both parties should also be content with the agreement that’s put into place.

3. Credit Laws Compliance The Federal Trade Commission has formulated laws to protect consumers from malpractices. Your company should meet all the standards and regulations.

You should communicate with your customers about the interest rate, billing mistakes, rules for debt collection etc.

4. Send Invoices you must choose the system of sending invoices to your customers. Digitisation and automation of the accounts receivable process to make it more efficient and accurate.

The invoice must contain information such as the invoice number, date, address of both parties, description of the product, amount due and the payment due date. This step is quite essential as it facilitates a sound system of acquiring account receivables.

5. Choose a Management System While some small businesses are okay with doing this work manually, you’ll need a management plan for your accounts receivables if you have a large company. For this, you need accounts receivable management software.

This software keeps track of invoices and payment due dates. The trial balance and other necessary data are present in one dashboard for easy access. All the data regarding sales are entered into the software, and invoices are created automatically.

6. Track The Collection Process For businesses, collecting the money that customers owe them, becomes a strenuous task. Therefore, companies must track the collection of accounts receivables. You should start with performing an invoice age analysis which helps you identify how late the invoices are.

You should have a policy that determines how long to wait before taking action on delayed payments. For example, you can allow your invoices to be overdue by 0-30 days, 31-60 days and so on. Based on this policy, you can send collectors or take legal action against the customers that did not make the payment timely.

7. Log-in Real-Time Charges and Expenses Your AR software must be capable of scanning orders, receipts, and requests. In addition, you should upload any other relevant document in the system required for invoice processing.

8. Give Your Customers Incentives For Making Early Payments. Giving a push to your customers is necessary sometimes to ensure a smooth workflow of your accounts receivable process.

For example, giving them discounts and incentives every time they make an early payment might encourage them to make payments timely. You can highlight these incentives when you send reminders for the payments or the business agreement.

9. Maintain Relationships With the Customers

It is essential to constantly stay in contact with your customers and maintain good relationships with them if you want them to make timely payments.

The more they like you and your services, the more likely they will be to pay for them on a timely basis.

10. Create An Escalation Plan You should have a plan of action ready within your account receivable process in cases where the customer is unwilling to pay despite your continued efforts. Set up a payment escalation plan by working with a collection agency in cases of unpaid invoices.

While the initial stages of the plan should be lenient, you can take stringent measures if you fail to get results even after a few tries. The collection teams can work by chasing late payments and creating or negotiating payment plans to facilitate customer debt collection.

Common Challenges Faced By an Accounts Receivables Process

Setting up an account receivable process is not free of challenges. While deciding the credit limit for a customer, a minor mistake can make you lose revenue over a customer that was worthless at the beginning itself.

While extending limits for valuable customers, you must be careful as it comes with heightened credit risk. If you have to face a circumstance where you need to involve a credit collection team, you should not let them ruin your relationship with your customer.

Apart from this, multiple operational risks can hinder the AR process. These include inaccuracies such as delays in invoicing, late payments, miscommunications in follow-up, etc.

Final Words

This guide has shown the importance of creating a smooth workflow for your accounts receivable process. You can take help from accounts receivable management software or a service provider who can carry out the process for you.

Everything becomes easier with automation, and the accuracy levels are also heightened, so once you’ve created the perfect strategy for your accounts receivables process, you should introduce software that can help you achieve full automation.

With Billsby, you can fully automate your invoices and the dunning process for when customers fail to pay on time. You can also seamlessly connect your Billsby account with supported accounting software to automatically populate your accounts receivables reports. So why not give Billsby a try today!