Accounts Receivable Services
Giving credit is an important part of a commercial relationship. It makes people buy from you again, boosts sales, and speeds up the supply chain. “Accounts receivable” is the amount of money that a customer owes a business for goods or services that have not yet been paid for.
Accounts receivable (abbreviated AR or A/R) refers to one of the following items:
- Unpaid or outstanding invoices
- Late payment
- Sales on credit
- Money expected from customers
Accounts receivable are payments for goods and services delivered based on specific credit terms. Accounts receivable require that expected payments are enforceable and legally binding. In an accounting system, accounts receivable are reported as assets on the balance sheet.
How To Handle Outstanding Invoices
A company should always have a plan for managing its accounts receivable. The accounts receivable process involves collecting, managing, and monitoring all outstanding invoices to ensure timely payment. It generates revenue for a company, strengthens customer relationships, streamlines the supply chain, and drives growth.
Credit procedures can be established that govern how credit is processed, who receives it, and what happens next. The most effective accounts receivable process includes credit management, invoicing, documentation, and consistent monitoring.
The step-by-step process for accounts receivable
- Develop a loan application process
- Create a fundraising plan
- Compliance with consumer credit laws
- Send invoices
- Choose a debtor management system
- Follow the collection process
- Record all costs and expenses in real time
- Promote early payment discounts
- Building and maintaining customer relationships
- Create an escalation plan
Accounts Receivable Cycle
The accounts receivable cycle begins with the provision of a service/product and ends when the invoice is settled and the amount is paid in full.
Below are the most critical steps you need to follow in the accounts receivable cycle:
- Create a loan application process
- Send invoices to customers
- Determine payment terms and due date
- Monitoring and reporting
- Record AR activity
The goal of the accounts receivable cycle is to maintain a consistently positive cash flow. It helps prevent bad debts by collecting invoices before they become due.
Lifecycle management includes requesting payment from customers, sending invoices and reminders, updating the balance sheet, and monitoring progress.
Accounts Receivable Turnover
The accounts receivable turnover ratio, sometimes called the debt turnover ratio, shows how well a corporation lends and collects debts. You may find it by dividing net credit sales by the average accounts receivable turnover ratio.
Net loan turnover per year ÷ Average outstanding amounts = ANNUAL turnover
The higher the ratio, the better the company manages its customers’ creditworthiness. It is a measure of efficiency used in balance sheet analysis.
This metric also quantifies how well a company manages its creditworthiness and how long it takes to collect outstanding debts. The metric takes into account how often a company (on average) collects exceptional debts during the year. Tip: This should be done monthly.
AR Ratio Formulas
Net Sales
Gross Sales – Refunds/Returns – Credit Sales = Net Sales
Average Debtors
(Opening Accounts Receivable + Closing Accounts Receivable) ÷ 2 = Average Accounts Receivable
Accounts Receivable Turnover
Net loan turnover per year ÷ Average outstanding amounts = ANNUAL turnover
Accounts Receivable Turnover In Days
Accounts receivable turnover ratio ÷ 365 = Accounts receivable turnover (in days)
Examples Of Accounts Receivable
Recording accounts receivable is a routine task that must be performed monthly. Accounts receivable are considered “current assets” and include both cash and cash equivalents. The asset account includes:
- Cash
- Claim
- stock
- Prepaid expenses
- Short-term loans
- Investments
An example of an outstanding bill is an electricity bill. An energy supplier supplies electricity and sends an invoice to its customers at the end of the month. The service has already been performed, and the credit has already been granted.
After the utility company invoices for the service provided, the liability is recorded as a receivable. When payment is received, it is recorded in the balance sheet, and the general ledger must be balanced.
How To Record Outstanding Invoices In A Balance Sheet?
While most businesses today use automated software to record account balances, it’s good to be familiar with the manual journal entry method of accrual accounting.
In this method, every transaction is recorded, even if no money is received. The sales account gets money, whereas the accounts receivable account loses money. When a payment is made, the cash account is debited and the accounts receivable account is credited.
The exact system for managing accounts receivable depends on the accounting method used. Accounts receivable personnel must be familiar with all procedures and understand how a particular process can affect the entire accounts receivable cycle.
You will find accounts receivable in your balance sheet or bank statement under the heading “Current assets”.
Benefits Of Accounts Receivable Management
The more trust and credit are granted, and the more punctually the payments are made, the more successful a business is. A well-organised accounts receivable system benefits everyone involved. The benefits include:
Speed And Efficiency
The average manual invoice processing takes 50 to 72 days. Faster invoicing leads to faster collection and shorter delivery times.
Invoice management through automated solutions like Taxtallypro streamlines the entire process. The following can be completed in just a few minutes:
- Send invoice
- processing
- The invoice was translated, enriched and validated
- Documents provided to buyers
- Archived to meet legal requirements
The average accounts receivable assistant can handle between 7,500 and 30,000 paper invoices annually, compared to more than 125,000 electronic invoices. It is 17 times more efficient than the traditional method.
Consistency And Accuracy
Automation results in fewer manual errors and ensures guaranteed invoice delivery. Lost invoices in the mail are a thing of the past. By automating the accounts receivable cycle, the entire accounting team has complete visibility into the process.
Automating the accounts receivable cycle leads to greater accuracy and consistency, providing a company with a more standardised cash flow process that utilises accurate data analysis and real-time reporting.
Cash Management
With a traditional, paper-based AR approach, employees spend a lot of time reviewing each invoice, responding to customer inquiries, handling exceptions, collecting data, etc.
Automation breaks all of this. Tasks are completed faster, with fewer errors, and with greater efficiency.
Accounts receivable management helps businesses free up working capital. The accounting team can focus on higher-value, growth-oriented tasks. It helps reduce costs for staff, printing, consumables, and shipping. It can save 60-80% on each invoice and generate more cash.
Forecast
Automated technologies like ad hoc reports, real-time dashboards, and others make it possible to see the whole AR lifecycle and get important data right away. It has the data needed for predictive analytics, like:
- To pay amounts
- Payment terms
- Delivery status
- Performance over time
The right automated AR platform provides essential insights and identifies opportunities to improve forecasts.
Security And Compliance
Paper-based accounts receivable processes are significantly more vulnerable to hacking, phishing attacks, data breaches, fraudulent billing, and GDPR violations. An automated accounts receivable solution sends 100% of your invoices electronically through a single vendor, regardless of delivery method, industry, size, or customer location.
Modern compliance can be complex, especially in global trade. Facility-specific regulations vary by customer.
E-invoicing enables the electronic transmission of invoices to relevant authorities in real-time, ensuring tax compliance, legal certainty, and cost savings. It also applies to the archiving of all documents.
Additional benefits:
- Improve customer loyalty and customer loyalty
- Less exception handling
- Track untapped profits
- Develop strategies for workflow automation
- Optimised customer experience
- Higher staff turnover
- General financial organisation
Frequently Asked Questions About Accounts Receivable
What happens if debtors fail to pay?
If a receivable remains unpaid, it is written off as an unsecured debt. Also known as an “unpayable debt,” it is a receivable, loan, or debt that is virtually impossible to pay.
There can be many reasons for this, including bankruptcy, fraud, and a lack of proper documentation to prove debt.
For accounting purposes, the amount is written off in the journal entries as a debit to the allowance for doubtful accounts and a credit to accounts receivable. If it is confirmed that no payment will be received, this is recognised in the income statement, and the unpaid amount is recognised as an expense for doubtful accounts. An increase in the cost for doubtful accounts reduces earnings.
Where does a company keep track of its outstanding receivables?
A company that does not monitor its accounts receivable and maintain collection policies may not be able to generate enough cash flow to run its business. Borrowing through a line of credit incurs interest charges, so it is essential to consistently monitor and track accounts receivable statistics to ensure smooth operations.
The most effective way to track outstanding receivables is to use an ageing schedule. This report categorises receivables by due date: 0-30 days, 30-60 days, and so on. The goal is to minimise the amount of money tied up in the oldest receivables.
Various strategies can help increase cash flow and reduce outstanding balances. The length of time to maturity varies by industry. Companies that typically receive payments over months have higher exceptional balances in the “60+ days” category. This report is also compared to the industry average.
What is the difference between accounts receivable and accounts payable?
A company’s balance sheet illustrates that accounts receivable are an asset and accounts payable are a current liability. The accounts payable balance is the total amount of bills that a company hasn’t paid yet to its suppliers. Accounts payable might include costs of doing business, regular bills, and other costs.
A comparison of accounts payable and accounts receivable accounting shows that although the accounting routines serve different purposes, similar procedures are used to manage both accounting processes.
In small businesses, owners typically designate a single person to manage both systems. For larger companies, it is advisable to separate the two functions and establish a dedicated person or team for each.
Current assets minus current liabilities represent working capital. To remain financially healthy, a company must generate sufficient assets to cover its liabilities.
A Smart Way To Keep Track Of Outstanding Invoices
When invoice volume and complexity become too time-consuming, automation is the solution. It is the best way to track the accounts receivable process. When a company needs to free up resources for more valuable tasks, the right solution must be carefully considered.
While many accounting automation platforms require extensive setup and configuration, Taxtallypro is quick and easy to implement. It’s a smart way to track outstanding invoices and reconcile accounts.
The process of reconciling general ledger accounts with balance sheet accounts helps auditors and accounting managers ensure that transactions are recorded correctly for the monthly closing and that adequate internal controls are in place.
Benefits of AR automation
- Optimise debt collection workflows
- Digitise invoice creation
- Accurate data analysis
- A standardised process for cash flow consistency
- Save time and money that you would otherwise have to spend on the manual debt collection process
Traditional Versus Accounts Receivable
The traditional method of accounts receivable management involves manually creating invoices in batches – sometimes daily – from spreadsheets. These invoices are then printed and sent via mail or email to initiate the accounts receivable process.
The traditional method requires a lot of manual effort, extra time and high labour costs. Everything is recorded manually in the balance sheet, which increases the risk of human error.
The manual AR process typically includes:
- Create invoices using Excel or MS Word
- Print invoices and then send them via mail or email
- Manual payment verification and follow-up via phone/email
- Manual journal entry and bank reconciliation
It is time-consuming, and the probability of errors is high.
The modern method of accounts receivable accounting uses automated software. It leverages the results of ERP systems to automate the sending of invoices. These can be sent via mail, email, or various digital options such as XML or EDI.
Electronic invoices provide businesses with real-time visibility into payment status by integrating payment methods into the invoice, including direct debit, credit cards, and other online payment options.
With AR automation, everything is updated instantly, and information is summarised in reports, allowing employees to spend more time identifying patterns and less time searching for papers.
The most common pain points for debtors
Poor Cash Management
Late payments lead to delayed collection costs. Poor accounts receivable management leads to poor cash flow and longer payment cycles. A lack of understanding of accounts receivable accounting between regions, bank accounts, and companies can lead to poor cash management.
Overdue invoices
Any delay in payment from customers negatively affects a company’s revenue. Make sure you have a clear plan for regular contact.
The longer invoices remain unpaid, the less money a business has available. Lack of clear policies that define the consequences of late payments (e.g. penalties) can also lead to customers paying carelessly.
Manual Processes
If someone in your accounts receivable department isn’t filling out invoices and envelopes, they’re doing something wrong. Manual processes waste time and leave too many opportunities for human error. Without automation, it’s difficult for a business to remain competitive.
False Reporting
If accounting software or systems are not up to date, it can lead to inaccurate reports. Make sure your staff is entering all necessary information into the system to match and process invoice payments correctly.
If invoices are paid but not recorded in the system, the balance sheet will be incorrect. Employees can then refer to invoices that have already been paid, which puts a strain on customer relations.
Tips for improving accounts receivable management
If you’re wondering how you can improve your accounts receivable process, here are some tips:
Formal Written Policy
Establish a formal policy and stick to it. For example, send an email when an invoice is 30 days late and call after 60 days. Following this policy will ensure higher customer satisfaction and faster payments. You can even specify that late fees are charged after a specific due date.
Create A Quote/Offer
Before a company signs a business agreement, it must provide the customer with a quote. The quote includes the products/services being sold, sales price, credit terms, etc.
This process provides customers with clear visibility into costs, eliminating surprises and resulting in faster invoice approval and payment.
Handling of doubtful debts
Uncollectible receivables should be reclassified as doubtful receivables. The easiest way to deal with uncollectible receivables is to write them off as uncollectible. The accounts receivable balance is then converted to doubtful receivables.
Setting Key Figures
Key performance indicators ( KPIs ) measure the health of the accounts receivable cycle. One of the most important indicators is the number of days’ sales outstanding (DSO). It indicates the average time it takes from invoice to receipt of payment. Other indicators to monitor include:
- Invoice accuracy
- Average number of days to invoicing
- Credit overdrafts
- Customer complaints
Baseline data should be used to establish benchmarks. Targets can then be set for each measurement to optimise the management of AR collection.
Regular Age Assessment
Proactively manage the collection process immediately after invoicing. The ageing report should be reviewed regularly, and appropriate action should be taken. An accounts receivable manager should take responsibility and develop a plan to follow up on outstanding invoices.
Different Payment Methods
Offering a variety of payment methods speeds up payment processing. In addition to checks, accepting credit cards and ACH payments can significantly shorten the accounts receivable cycle and enhance cash flow. Nowadays, payments can even be made within minutes via a mobile device.
Create A Follow-Up Policy
Create a consistent follow-up policy for all clients. A team member must send a notification when a payment is missed. AR software does this immediately when an invoice falls into the “overdue” category. Digital reminders are automatically sent for outstanding invoices.
Negotiation Of Late Payments
If a customer is honest and can’t pay on time, offer them a 1-2% discount if they pay within 10 days. While the new payment terms may mean lost revenue for the company, they are only a last resort to motivate customers before contacting a debt collection agency.
Enter Payments Immediately
All payments must be processed promptly. The funds must be matched and closed against a specific invoice in the accounting system. It ensures that all managers have the most up-to-date due date report and that no payments are incorrectly matched or collected, even though they have already been paid.
Dispute Resolution Procedures
Invoice disputes can damage a business relationship if not handled properly. By establishing a dispute resolution policy, a company can prevent these problems. It includes answering questions such as:
- Who takes care of customer contact?
- What evidence is required?
- What happens if a payment fails?
The faster problems are resolved, the longer a business relationship can last.
Forecast
Forecasting allows a company to compare recurring expense invoices to expectations to determine if a system outage is occurring. By automating the process, invoices are sent on the same day each month, avoiding unexpected delays.
Businesses with customers who pay monthly, quarterly, or annually must have accounting procedures in place to plan for future billing.
Use Automation
The best thing a business can do today is to automate the accounts receivable process as much as possible. Use AR software to support tasks such as:
- Eliminate time spent on manual tasks
- Generate automatic reminders and
- Reports over a specific period to stay up to date
- Analyse financial statistics and key figures
Automation makes mistakes less likely and speeds up the process of processing recurring bills.
Sending electronic invoices (and offering an online payment option) encourages customers to pay on time. It, in turn, speeds up the collection process. In addition, invoice automation improves the overall customer experience and leads to increased revenue.
Finally
Keeping track of outstanding receivables can be a complex process. The more consistently a company controls its billing and collection processes, the fewer bad debts accumulate.
Collecting payments on time while maintaining positive customer relationships and a healthy cash flow is always a delicate balancing act. That’s where automation comes in. When a robot takes over mundane tasks, real people have more time for innovation, creativity, and business growth.