Accounts receivable or the AR process is the key to receiving payments from customers. Companies use it to manage the cash inflow and their collection process for the goods or services they have already sold.
In order to handle RA efficiently, it is 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 need to have in-depth knowledge of all aspects of AR, cash application, contact management, collections, and credit management in order to operate comprehensively.
According to some research results, accounts receivable make up between 2/5 and 1/3 of the total balance sheet, and yet most companies end up not managing this process effectively. Risk management is often not proportional to importance, despite the fact that it significantly affects the bottom line of all companies, regardless of their 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
- Receipt, assignments and reconciliations
- Collections
- Dispute handling
- Bad debt
Credit decisions – This step includes verifying if the potential 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 also pays when they are ready to do so.
Receipt, assignments and reconciliations – This step is handled by an AR officer. They identify a payment that is deposited into the provider’s bank account. Then they received it in the system and assigned the payment to the corresponding invoice. The reconciliation is then performed to ensure that it is a correct payment.
Collections – All unpaid or paid invoices are identified by the collection officer on a certain date. This could also include sending customer reminders and receiving payments as and when, or as per company / business policy.
Management disputes – Normally, this step is managed between the collection officer and the client, if the clients / clients dispute an invoice or an invoice. However, in some companies (mainly B2C models), there may be teams dedicated to handling disputes.
Unchargable debts – Any debt is observed during a period of time or a certain 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.