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Accounts Receivable Process (Cycle) Step-by-Step

Accounts receivable (AR) is a critical component of any business’s balance sheet. It denotes the quantity of trade credit a company extends to its customers.

The AR cycle has numerous steps, beginning with a new customer’s onboarding and ending with them placing an order and paying for it. Understanding this process is therefore crucial for optimizing it and ensuring that the company’s cash flow is not impeded.

Businesses who figure out how to smooth out this cycle have a strong cash flow, lower DSO, and can access new growth prospects. In this piece, we will take a step-by-step look at the accounts receivable process and see how organizations may optimize it.

The accounts receivable process is a collection of activities that organizations perform in order to manage and collect money due by their customers. It includes keeping track of bills and payments, following up on late accounts, and making certain that payments are processed and recorded correctly.

In general, the accounts receivable process begins with the establishment of credit policies, which define how much credit a company is ready to give to clients and under what conditions. When a consumer purchases on credit, the company will generate an invoice that itemizes the charges and establishes payment terms and due dates. The invoice is subsequently sent to the customer, and the payment status is tracked until the payment is received.

The company will follow up with the customer by phone calls, emails, or letters to remind them of their unpaid debt if the payment is not made by the deadline. If the client is unable to pay, the company may take legal action or involve a collections agency to speed up the collecting process.

As soon as a payment is received, the company processes it and matches it up with the relevant invoice in their accounting system. In order to pinpoint areas for process improvement, the company may also produce reports and analyze data connected to its accounts receivable, such as the typical payment time.

Overall, benefits of using cash management software for Business sustaining positive cash flow and reducing the risk of bad debts depend on an effective accounts receivable procedure. Businesses may guarantee that they receive payment for the goods and services they deliver in a timely way by having clear credit policies, accurately billing, following up immediately, and processing payments efficiently.

What are the steps included in the accounts receivable process?

Accounts receivable procedures play a crucial role in overseeing a company’s finances since they help guarantee prompt payments from clients and preserve a healthy cash flow. The accounts receivable process consists of a number of processes, each of which is essential to maintaining client accounts and guaranteeing on-time payment collection. We’ll walk you through each step of the accounts receivable process in this blog.

Establish Credit Policies

The first step in the accounts receivable process is to establish credit policies. Credit policies define how much credit a business is willing to extend to customers and under what terms. This step involves setting payment terms, credit limit considerations, and ensuring that customers understand their obligations. Clear credit policies help to ensure that everyone is on the same page and that payments are made on time.

Accurate Invoicing

Accurate invoicing is the next phase of the accounts receivable procedure. Businesses must make sure that their invoices are itemized, properly formatted, and that payment terms and due dates are included. Maintaining a steady cash flow also depends on timely invoicing procedures. A proper invoice ensures that consumers are informed of their duties and helps to prevent disagreements.

Prompt Follow-Up

Follow-up on outstanding invoices is critical for the accounts receivable process. This step involves setting reminders and tracking payment status to stay on top of overdue payments. Using automated messaging and personalizing communications to customers can streamline follow-up efforts and increase the likelihood of receiving payments on time.

Collection Strategies

If follow-up efforts are unsuccessful, it’s time to escalate collection efforts. This step involves defining collection strategies and knowing when to escalate efforts. Using internal and external resources for collections and balancing collections with customer relationships can also be important considerations.

Payment Processing

Once payments are received, it’s critical to accurately and efficiently process them. In this step, accounting software is integrated with payment systems, record-keeping and reconciliation procedures are upheld, and accounts receivable data is reported and analyzed. Effective payment processing aids in improving cash flow and managing accounts receivable for firms.

What does a traditional vs. modern accounts receivable process look like?

In the past, the accounts receivable procedure required a lot of manual labor and paper-based records. In the past, companies would print and distribute paper invoices to their clients, then manually track and record customer payments in an accounting system or ledger. Additionally, the follow-up procedure for overdue payments would be carried out manually by phone calls or postal letters.

Modern accounts receivable systems, in contrast, use technology to streamline the process and automate many of the manual operations. Businesses can prepare and transmit invoices digitally using electronic invoicing (e-invoicing), saving time and money formerly spent printing and mailing paper invoices. Customers can make payments online through payment gateways and online payment processing systems, which can then be processed automatically and matched up with the relevant invoice in the accounting system.

Automation and data analytics are also used in contemporary accounts receivable operations to increase productivity and decision-making. For instance, companies may employ software to automatically flag high-risk accounts for collection operations or to notify customers about past-due payments. Businesses can improve their credit rules and collection tactics by using data analytics to gain insights into payment trends and client behavior.

Overall, the accounts receivable process of today is more effective and efficient, using less time and money than manual procedures while increasing the precision and speed of payment processing.

What are some tips and best practices for optimizing the accounts receivable process?

Here are some tips and best practices for optimizing the accounts receivable process:

Establish clear credit policies: Clearly defining credit policies upfront can help prevent late payments and bad debts. Set credit limits for customers and clearly communicate payment terms and due dates. Be consistent in applying credit policies across all customers.

Use electronic invoicing: E-invoicing, also known as electronic invoicing, can reduce the time and expenses needed to print and mail paper invoices. Because invoices can be sent and received electronically and payments can be handled immediately, e-invoicing can help speed up the payment process.

Follow up promptly: Promptly follow up on overdue accounts to remind customers of their outstanding balance. Use automated reminders to streamline the process and avoid missed follow-ups.

Use data analytics: Gain insight into customer behavior and payment trends by using data analytics. Keep track of payment patterns and spot high-risk accounts that need extra care. Optimize credit policies and collection tactics using the information provided.

Multiple payment alternatives are provided: Give clients a variety of payment choices, including credit cards, ACH transactions, and internet payment portals. This could facilitate faster payment processing and improve client convenience.

Automate as many manual operations as you can to save time and cut down on mistakes. Utilize software to generate invoices, send out reminders, and match up payments with related bills.

Train employees: Make certain that those working on the accounts receivable process are appropriately taught and equipped with the skills and information required to do their jobs well. This could increase effectiveness and decrease errors.

Businesses may enhance cash flow, lower the risk of bad debts, and enhance overall financial performance by putting these best practices into practice and regularly monitoring and optimizing the accounts receivable process.

How can KredX Cash Management Solution help automate your AR processes?

KredX Cash Management Solution is a digital platform that can help businesses automate their accounts receivable processes in several ways. Here are a few ways KredX Cash Management Solution can help:

Faster invoicing: Invoices can be easily and rapidly generated by businesses and distributed to clients by email or text message. As a result, generating and shipping paper invoices takes less time and money.

Payment tracking: Allows businesses to track payment status in real-time. This helps businesses stay on top of overdue accounts and follow up with customers as necessary.

Payment reminders: Cash Management Solution sends automated payment reminders to customers, reducing the need for manual follow-up. This can help reduce late payments and improve cash flow.

Payment reconciliation: Automatically reconciles payments with corresponding invoices, reducing the need for manual data entry and reconciliation.

Reporting and analytics: KredX Cash Management Solution provides businesses with detailed reports and analytics on their accounts receivable performance, including payment trends and customer behavior. This can help businesses make data-driven decisions to optimize their credit policies and collection strategies.

Overall, Cash Management Solution can help businesses streamline their accounts receivable processes, reduce the risk of bad debts, and improve cash flow. By automating many of the manual tasks associated with accounts receivable, businesses can save time, reduce errors, and improve efficiency.

Hemant Joshi

Hemant is a product leader with more than a decade of experience building products that have impacted the way individuals and enterprises pay and get paid, including India's first B2C BNPL solution Lazypay. At KredX, he has structured multiple working capital financing solutions for Indian and multinational companies. Most recently, he built KredX CMS, a holistic suite of products for new age CFOs.