The accounts receivable or AR process is the key to receiving payments from customers. Businesses use it to manage their cash inflow and collection process for goods or services they have already sold.
In order to handle AR efficiently, it’s important that your finance and accounting team know the keys to handling each and every step effectively. They must also be able to collect payments on time and innovate and develop the latest strategies. They also need to be optimistic when it comes to best practices to maximize their cash flow. Additionally, they must have in-depth knowledge of all aspects of AR, cash application, contact management, collections, and credit management in order to operate holistically.
According to some research results, accounts receivable make up 2/5 to 1/3 of the total balance sheet, and yet most companies end up not managing this process effectively. Risk management is often out of proportion to importance, yet it significantly affects the bottom line of all businesses, regardless of segment, domain, or any other factor.
AR processes are really important because they affect the entire cash flow of the company. Furthermore, they can also become a bottleneck for all accounting and bookkeeping processes. Therefore, it is often preferable for a company to constantly monitor.
The process has several steps such as:
- credit decisions
- Billing and Distribution of Invoices
- Reception, Assignments and Reconciliations
- collections
- dispute management
- bad debt
credit decisions – This step includes verifying whether or not the prospective customer has sufficient credit worth to obtain the products or services provided to them under an account agreement.
Invoice Distribution and Billing – This happens after the services/goods have been provided to the customer. The customer usually completes the payment once the invoice is generated, but sometimes they also pay when they are ready to do so.
Reception, Assignments and Reconciliations – This step is handled by an AR Officer. They identify a payment that is deposited into the supplier’s bank account. Then they receive it in the system and assign the payment to the corresponding invoice. Reconciliation is then performed to ensure that it is a correct payment.
collections – All invoices that are unpaid or short paid are identified by the collection officer on any given date. This could also include sending customer reminders and receiving payments when required, or as per company/business policy.
dispute management – Usually this step is managed between the collections officer and the client, if clients/clients dispute a bill or invoice. However, in some companies (mainly B2C models), there may be dedicated dispute handling teams.
bad debts – Any debt is observed for a certain period of time or a date. If a debt goes beyond this debt and/or is disputed and a mutual resolution is not agreed upon (to the satisfaction of the provider), then the bad debt is placed in the bad debt category.