If you own or operate a business, it’s essential to understand core accounting principles and how they can help you better manage your enterprise’s finances. One of the most critical elements in any business is accounts receivable (AR).
Accounts receivable describes money that your business is owed from its customers or clients. Correctly managing your AR can help you reduce cash flow problems, improve investment, and run a successful business.
In this guide, we take a deep dive into AR management to help you understand its importance. We’ll also take a closer look at some core practices you can incorporate to improve your AR management processes.
What is Accounts Receivable?
As mentioned above, accounts receivable refers to the money that is owed to you by your customers or clients. This only refers to money owed for orders that are already complete.
For example, if you sell 100 computers to a client and issue an invoice outlining the amount owed, this balance will now sit in your AR until payment is complete.
As you have completed the order, but your customer is yet to pay, you are effectively extending a line of credit to your customer.
Why is Accounts Receivable a Valuable Part of a Business?
AR is extremely important to all businesses for a variety of reasons. First, it allows you to understand your business’s future revenue. Without future revenue, you won’t be able to plan for investing, stock purchases, paying bills, and other core expenses.
Next, your AR can help you identify a range of metrics. For example, if you’re trying to identify customers that consistently pay late and impact your cash flow, your AR will be a good starting point.
Lastly, if you have investors, or you plan on selling your business in the future, your AR will be one of the primary factors third parties assess to determine the health of your business.
What is Accounts Receivable Management?
Accounts receivable management is the process of keeping tabs on all AR elements. Whether it’s performing credit checks on your customers, issuing invoices for payments, providing reminders to customers that are yet to pay, or performing any other AR-related task, it will fall under the ‘accounts receivable management’ umbrella.
Why Effective Account Receivable Management is Important
When you’re invoicing customers, you’re extending credit if payment is not due at the time of order fulfillment. This means that you will need to rely on your customers to pay invoices – if they don’t, your business might make a serious loss.
For this reason, AR management is extremely important. By improving your AR management, you can reduce the chances that your business extends credit to a client that is unable or unwilling to pay. AR management also helps you keep tabs on payments to ensure money is received when it’s due.
While these benefits will help your business, they can also help your clients. Many customers enjoy working with businesses that trust them to pay their bills. Extending credit to your clients can help you build long-term relationships and generate future revenue.
5 Account Receivables Procedures and Best Practices
If you want to manage your accounts receivable effectively, there are a few steps you can take to ensure best practices. Below, let’s explore seven account receivable procedures that we recommend to our readers:
1. Establish Billing and Invoicing Procedures for Accounts Receivable Tracking
The first account receivable management step any business should take is to communicate billing and invoicing procedures internally. Your staff members must understand the business’s expectations for billing, managing AR, and handling any other related tasks.
For example, if you want invoices issued immediately after an order is dispatched, make sure this is communicated to your team. Also, if you want your staff members to send payment reminders on due dates, make sure there is a process in place for this. Consistency is essential if you want your AR management plan to succeed.
2. Communicate Policy Payment Terms and Deadlines
Payment terms and deadlines should be clearly outlined on your invoice. Not doing so can create issues.
Many businesses request payment upon receipt, but this is vague. If you want your customers to stick to payment deadlines, put a specific due date on the invoice.
You should also include other details regarding your payment terms. Outlining payment options and other core details will help your customers understand their obligations.
3. Manage Accounts Receivable Billing Regularly
Overviewing your existing accounts receivable routinely is essential if you want to stay on top of payments. If you have many clients, it’s impossible to mentally track what your business is owed. Setting aside time once or twice a week to overview current invoices and payments is essential.
4. Take Advantage of Automated Recurring Billing
Automated recurring billing can simplify your invoicing. If you’re selling products or services on a routine basis, you can use a recurring billing service to automatically generate invoices. This is especially useful if you have a subscription business model.[1]
5. Outline Credit and Collection Policies
Always be clear about your credit and collection policies. Your clients will likely be trying to manage personal or business credit scores, which means they will want to avoid credit or collection issues showing up on their credit report.[2]
Make sure that clients understand their obligations, as well as what will happen if they fail to meet your payment requirements.
This is also important because you don’t want to damage your relationships with your clients by blindsiding them. If you use a harsh collection policy without warning, it can permanently damage a business relationship.
Accounts Receivable Collections Best Practices
On top of following all the previously mentioned tips to avoid account management problems, it’s essential to have a collections policy in place.
Make sure to offer reminders to clients, which can help them keep on top of their payments. You should also outline any penalties for late payments.
If a client is late in paying an invoice, you may want to offer a payment plan. This can help you collect payments without impacting your clients’ credit scores. However, if a client refuses to pay an invoice or enter a payment plan, you may want to use a third-party collection platform.[3]
Also, it’s a good idea to avoid extending credit to a client that already owes money. Make sure to collect money upon dispatching a product or service if a client has not paid a previous invoice.
Make it Easy for Customers to Pay
Lastly, it’s critical to make ease of payment a core element of your business, like sending a custom payment link via text message. The easier it is for your customer to pay, the less likely you are to experience delayed payments. If you have a long, multi-step payment system with restricted options, it can lead clients to put off paying your bills until they’re forced.
By using a payment processor that can process credit and debit card transactions online, you can increase the ease of use for your clients.
What is Often the Most Critical Part of Managing Receivables?
Oftentimes, the most critical part of managing receivables is remaining organized. If you let your AR management get out of hand, problems can snowball, which can produce late payments, cashflow problems, and a host of other issues for your business.
Make sure to keep constant tabs on your AR. Also, perform checks on clients before extending large amounts of credit. If a client has a history of not paying your invoices, this should be flagged before you engage in any further business transactions.
Accounts Receivable Process Improvement Ideas
While the steps you should take to improve processes will depend on your current internal controls, there are a few tips that may be useful for most business owners.
Firstly, if you’re not putting a due date on your invoices, make sure to update your invoices to include a date and payment terms. Updating your terms wording can also help you clarify payment requirements to your clients.
Next, put systems in place to routinely check on invoice statuses. Encourage your staff members to be communicative with clients. Maintaining strong customer relations can help you manage your AR better.
Lastly, upgrading to a new payment processor that allows invoice processing can immediately improve the ease of payments.
Automate AR Management and Software Solutions
One of the best ways to make immediate improvements to your AR management is to update your software. Fortunately, business owners now have a range of software options at their fingertips.
Paysley’s invoicing software offers top-of-the-line AR management, allowing you to generate invoices, track payments, view ledgers, and perform a variety of other tasks. This will allow your staff members to have a bird’s eye view of your accounts receivable. Not only can paysley save your company time, but it can also help you protect your revenue and avoid missed payments.
Accounts Receivable Management: Final Thoughts
Now that you understand AR management and the various best practices that can help your business succeed in this department, it’s time to implement internal controls in your business. The sooner you begin overhauling your AR management processes, the more you’ll benefit from improved accounts receivable outcomes.
Communicating with your billing team and accountants can help you reduce confusion and create top to bottom cohesion with new practices. Never underestimate the importance of using strict internal controls for your AR management processes.
Sources:
- Hubspot. “What’s a Subscription Business Model & How Does It Work?
- CNBC. “How to check your business credit score for free.“
- Forbes. “What Kind Of Business Might Need A Collection Agency?”
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