The accounts receivable process is the set of activities that companies use to manage customer invoices and payments. The accounts receivable process aims to ensure that customers pay their invoices on time and that the company receives payments promptly.
10 Steps: How to Process Accounts Receivable
- Developing a credit application process: This step involves creating a formal application process for new customers who want to purchase goods or services on credit.
- Creating a collection plan: A collection plan outlines how the company will collect payments from customers with outstanding balances.
- Compliance with consumer credit laws: Companies must comply with all relevant consumer credit laws when extending credit to customers.
- Sending out invoices: Invoices must be accurate and sent to customers promptly.
- Choosing an accounts receivable management system: Several software systems can help companies manage their accounts receivable process.
- Tracking the collection process: It is essential to track which invoices have been paid and which are still outstanding.
- Logging all charges and expenses in real-time: Companies should maintain accurate records of all charges and expenses related to the accounts receivable process.
- Incentivizing early payment discounts: Some companies offer discounts to customers who pay their invoices early.
- Building and maintaining customer relationships: It is essential to build strong relationships with customers to encourage timely payment of invoices.
- Creating an escalation plan: If payments are not received promptly, there should be a plan for how the situation will be escalated.
Best Practices Of Accounts Receivable Process In Billing
There are also several best practices that companies should follow when managing their accounts receivable process, including:
- Providing an estimate/quote: Customers should be given an estimate or quote before purchase to know how much they will need to pay.
- Creating a follow-up policy: Companies should have a policy for following up with customers who have not paid their invoices promptly.
- Establishing KPIs: Key performance indicators (KPIs) should be established to track the performance of the accounts receivable process.
- Regular Aging Review: The accounts receivable aging report should be reviewed regularly to identify any invoices that are past due.
- Different Payment Methods: Customers should be given a variety of different payment options so that they can choose the one that is best for them.
- Inputting Payments Immediately: Payments should be inputted into the accounting system as soon as they are received.
- Invoice Dispute Process: There should be a process for promptly resolving invoice disputes.
- Ongoing Forecasting Revenue: Companies should regularly forecast their ongoing revenue to ensure they have enough cash flow to cover expenses.
- Use Automation: Automation can help companies save time and money by automating repetitive tasks.
- By following these steps and best practices, companies can ensure an effective and efficient accounts receivable process.
More Tips For How Accounts Receivable Process Works Successfully
Keep track of all customer interactions and correspondence related to invoices in a central place. It could be a physical file or an electronic database. It will help you stay organized and track which customers have paid and which have not.
Establish clear payment terms with customers from the outset. Include the payment terms on invoices and other correspondence. It will help avoid confusion later on.
Follow up with customers promptly if payments are past due. Take your time reaching out, as this could damage your relationship with the customer. Instead, send a courteous reminder as soon as the payment is late.
Consider offering a discount for early payment. It could incentivize customers to pay their invoices sooner rather than later.
Stay flexible in your approach to collections. Each customer is different, so you’ll need to tailor your collections strategy to the individual. Be firm but fair in your dealings with customers.
Traditional Accounts Receivable Automation
As the name suggests, traditional accounts receivable automation relies on manual processes and often requires the use of paper documents. It can make the process slow and cumbersome, and prone to errors.
Common traditional accounts receivable automation methods include:
– Manual data entry involves entering customer information, invoices, and payments into a software system.
– Paper-based invoicing: This involves sending invoices to customers via paper mail. Customers can then make payments by mailing a check back to the company.
– Manual payment processing: This involves manually processing customer payments received via check or money order.
While traditional accounts receivable automation methods can be effective, they are often time-consuming and labor-intensive. In addition, the reliance on paper documents can make the process susceptible to errors.
Modern Accounts Receivable Automation
On the other hand, modern accounts receivable automation relies on technology to automate various aspects of the process. It can make the process much faster and easier and less prone to errors.
Common modern accounts receivable automation methods include:
– Electronic data entry: This involves using software to capture customer information, invoices, and payments electronically.
– Electronic invoicing involves sending invoices to customers electronically, typically via email. Customers can then make payments electronically, typically via credit card or ACH transfer.
– Automatic payment processing: This involves using software to process customer payments that are received electronically automatically. As you can see, modern accounts receivable automation methods offer several advantages over traditional methods. In addition to being faster and easier, they are also less susceptible to errors.