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Accounts Receivable Process Step-by-Step

September 22, 2021

There are many reasons to start a business, and the one thing all business owners have in common is the need to be profitable. Companies small and large must maintain a positive cash flow, which is where your accounts receivable (AR) personnel play a pivotal role in ensuring money owed from customers is received on time. Not an easy task by any stretch of the imagination.

In its most simplistic form, accounts receivable can be thought of as an IOU. For instance, the electricity your business uses is invoiced at the end of the service period. Although you’ve already consumed the electricity, payment is made in arrears. In most cases, customers make payments on or before the due date, however without the right accounts receivable processes in place the financial health of an organization can quickly go awry.

Flawless Accounts Receivable Starts with Four Steps

Here are the four key accounts receivable steps that every company should embrace.

1. Establish credit practices

To eliminate customers who are unlikely to pay you for the services or products delivered, this first step includes determining their credit worthiness. To do this you first need to establish a credit application process. Sounds easy enough but there are multiple steps in this process, including:

  • Determine the amount of credit you want to extend to customers.
  • Establish the payment time period.
  • Decide on whether you want to offer early payment discounts, and if so the discount percentage.
  • Determine late payment penalty fees.
  • Identify other conditions that are specific to your business or industry.

It is also important to establish the terms and conditions of credit sales to clearly outline the customer’s obligations and requirements. You need to ensure that it complies with federal credit laws, such as communicating credit interest rates.

Now that the basic credit terms and conditions have been established, there are other considerations such as:

  • If a current customer, how long have they been a customer?
  • What is the payment record of the current customer?
  • What are the credit terms of your competitors?
  • How healthy is your cash flow?

With this in place, now you need a way to determine the credit-worthiness of current and potential customers. This is typically accomplished via a credit check. To perform a credit check, you need to adhere to the following:

  • Receive a signed authorization from the customer.
  • Get their full legal name, date of birth, and social security number.
  • Use one of the top three credit reporting agencies – Equifax, Experian, or TransUnion.

2. Invoice customers

To avoid confusion and late payments, invoices need to clearly communicate transactional information and include the following:

  • A unique invoice number.
  • Details of the products delivered and/or services rendered.
  • The cost of the products and/or services.
  • Date payment is due and payment terms.

You should also provide the option of paper or electronic invoices. Electronic invoices are more convenient, provide prompt delivery, and are more cost efficient. To keep your invoicing processes on track, consistent and accurate, cloud-based software that automates invoice processing will reduce manual efforts and increase first time billing accuracy.

3. Track accounts receivable

Think about it… if you owned a coffee shop you wouldn’t let customers leave without paying for their coffee – would you? Although a simplistic example, the same is true regardless of the industry. Tracking what is owed is essential to ensure long-term profitability. Invoices that have not yet been paid need to be accounted for in an accounts receivable ledger. Essentially, this is a list of invoices that include balances due. To ensure accuracy, confirm that the total balance due agrees with the total accounts receivable within your balance sheet. To reduce manual effort and the potential of errors, a cloud-based software solution enables you to automate the entire process – payments, credits, refunds, and dunning.

4. Accounting for accounts receivable

There are two accounting methods to consider for your receivables – cash-basis accounting and accrual-basis accounting. Regardless of the method, be sure that you accurately record and account for all transactions. To do this, document accounts receivable using your invoices and describe the products and/or services provided, the amount owed, and when the payment is due.

Whether customers are paying with cash or checks, the accounts receivable processes you put in place needs to manage verification of payments and risks.

Optimize Your Accounts Receivable Processes

You want and need payment as soon as possible. Manual efforts are time consuming, result in payment delays, and are error prone; putting your business at financial risk. Modern approaches to accounts receivable automates the entire process from invoicing and accounts receivable to revenue management and collections.

BillingPlatform provides the data needed to manage the complete accounts receivable process including seamless integration to any third-party systems required to support your financial ecosystem and delivers up-to-the-moment reporting and business intelligence for accurate financial insights. Our cloud-based system was designed to give you complete financial control. With us you get a platform that spans mediation, rating, invoicing, collections, revenue recognition, A/R subledger, and more – providing you with everything needed to fulfill 100% of your AR business processes. Learn more about how we can help by reaching out to our team of experts today!

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