For many business leaders, the accounts receivable cycle is thought of as just cash collections, but it's actually more complex than that. Playing a vital role in the accounting cycle and general business functions, the accounts receivable team is responsible for reviewing purchase ordersCheck each customer's credit, grant appropriate credit terms, send invoices, collect payments, and manage key financial metrics such as age of ARs and bad debts.
No matter what product or service your company sells, the entire accounts receivable cycle is critical to your success. Without proper cash collection, you will have cash flow and liquidity problems; Without well thought out contracts with customers, customer relationships could suffer; and without keeping a close eye on AR metrics, your leadership team won't be able to make the right business decisions. The accounts receivable process is about thanking every penny of cash flow coming into your business.
In this article, we'll walk you through the full-cycle AR process, highlight the benefits of a well-managed AR cycle, and help you understand the ways automation and technology can optimize AR-related tasks. You will get answers to all your burning questions.
What is the Accounts Receivable Process or AR Cycle?
AR processing is more than sending payment reminders to customers and chasing late payments. If that's where your organization's AR strategy starts, you'll lose money and spend more time cleaning up the clutter than doing business. The complete AR cycle actually begins with proper review of each purchase order Your company receives from a customer who wants to make a purchase.
It's easier to observe the cycle visually, so let's start there.
As the flowchart illustrates, there is much more to do AR Management what it seems like. Yes, you need your AR team to be comfortable having difficult conversations with clients who have unpaid invoices, but you also need them to be proactive, manage risk, and conduct detailed AR reporting.
To better show the importance of each of the steps above, let's go through them one by one.
Accounts Receivable Process Steps: The Complete AR Cycle Workflow
If the accounts receivable account, which is an asset, does not materialize into cash, you are leaving money on the table and putting your business at risk. When looking at the entire cycle, accounts receivable optimization depends on each and every step. One is not more important than the other, but each step of the AR cycle impacts your organization's ability to raise cash and increase profit margins.
Step 1: Customer places an order
Whether you work in the B2B or B2C space, customers must place orders to start the accounts receivable cycle. In the B2B space, when a purchase order is received, one of the first teams that will see it is the AR team. They must perform due diligence to ensure that the purchase order is legitimate, contains the correct information, and is not fraudulent. At this stage, the sales team can be involved to notify AR about an incoming order.
Step 2: Credit Review and Approval
With a legitimate purchase order in hand, accounts receivable experts must further protect your company from risk by evaluating the creditworthiness of each customer. For new clients, a thorough credit application process must be carried out. never be omitted. With existing customers, check their payment history with your organization. Do they pay on time? Have you ever missed a payment? Maintaining detailed customer records is key to reducing bad debts and mitigating financial risk.
Step 3: AR sends an invoice
Once a client's creditworthiness is determined and your AR team feels comfortable continuing with the compliance process, a bill is sent to the client. The invoice must include the payment terms, the product being purchased, and contact information for both companies. In the same way AP Automation helps the AP team automatically process and pay incoming invoices, AR automation supports the sender side of that transaction.
Step 4: Send payment reminders and collect funds
After you send an invoice, the timer starts. Customers only have the specified payment window to send payments. If your payment terms are N30, meaning you are contractually obligated to pay the invoice within 30 days of receipt, your AR team should send payment reminders periodically until payment is received. To make things even easier, automate payment reminders and other repetitive tasks using accounting automation software.
Step 5: Update Bad Debt/Write Off Uncollected Funds
Although not ideal, a reality of doing business is that there will always be one or two non-paying customers. When this happens, it can be a huge financial hit, so it's imperative to thoroughly perform each step of the accounts receivable cycle. If the customer ignores all attempts to collect payment, the debt will be written off as bad debt. The timeline for writing off a bad debt will depend on your industry, the customer's payment terms, and any special circumstances involved with that specific purchase order.
Step 6: Receive and process incoming payments
The positive is that most customers will pay their bills. When the funds are received, the AR team must close the invoice and update the accounts receivable tracking mechanisms you have in your organization. Make payment as easy as possible for customers by offering automatic payments, ACH, bank transfers, or other payment methods.
Step 7: Address disputes
This won't be part of every AR process, but if a customer is disputing an invoice for any reason, now is the time to handle that situation. Perhaps they were not satisfied with the product they received or claim to have never received it. AR shall make every effort to resolve disputes and raise funds. Sometimes customers pay a portion of the bill (a short payment) and it's up to AR to figure out why that happened and chart a path to collect payment in full.
Step 8: Manage AR Reports
There are many metrics that are critical when it comes to the full-cycle accounts receivable process. He AR turnover ratio, Days Sales Outstanding (DSO), and Collection Effectiveness Ratio are some common metrics managed by the AR team. During the month-end closing process, which is the last step of the overall accounting cycle, the AR team will submit the necessary journal entries and ensure that the AR accounts in the general ledger are updated appropriately.
Benefits of automating the accounts receivable cycle
In the same way that manufacturing software can be used to automate much of the manufacturing process, automation software can (and should!) be implemented throughout the entire AR cycle. AR processing is tedious, complex, and requires a lot of detailed tracking to “get it right.” It can be difficult for even the best AR teams to keep up with payment reminders, credit checks, month-end reports, and the many other demands that come with their duties.
With the right automation tools and proper implementation, your AR team will experience increased productivity, better reporting, and many other benefits.
Reduced processing time
AR processing is time-consuming. The more purchase orders you receive, which is great for business, the more stress your AR team will experience. With automation, eletronic bills They can be created and sent to customers automatically, payments can be received without human intervention, and even credit checks can be initiated by a computer. With all the time savings your AR team will experience, they will be able to focus their days on more value-added activities.
Enterprise scalability
If you want to be able to grow your business, AR needs to be able to keep up with that growth. The same team of, say, 3 people, cannot go from managing all AR processing for 30 clients to managing all AR processing for 3,000 clients. To achieve that level of scale, automation tools are essential.
Reminders and automated payments
Chasing down payments can be a full-time job in itself. With automated reminders, automated payment processing, and automatic system updates, AR teams can focus on initial due diligence, customer relationships, and functional KPIs. Automatic reminders alone can improve your AR turnover ratioboost cash flow and ultimately impact the bottom line.
Fewer data errors
When it comes time for the month-end close, if any data throughout the month was recorded incorrectly, it can take a long time to untangle the thread and understand where the error occurred. But, with automation, computers copy data seamlessly and very rarely make errors while entering data like their human counterparts.
Cost savings
Beyond improving the collections effectiveness rate, there are very real cost savings waiting to be realized by automating the accounts receivable cycle. Fewer people will be able to process more transactions, your organization's cash flow levels will be healthier, and you'll write off less bad debt than ever before.
Enhanced information and reporting capabilities
Financial reports and data-driven insights help drive business decisions. In the past, AR teams didn't have the bandwidth to generate top-level reports because they spent all their time making collection calls and performing credit checks. Now, with automation, that time has been freed up, but it doesn't end there. The best software solutions come with built-in dashboard capabilities and reporting features that provide real-time updates on the most important metrics your leadership team relies on.
Stop leaving money on the table
It is a simple fact that the more effective an organization's AR process is, the better it will perform. You cannot continue doing business without sufficient cash flow to sustain your operations and you will not have any cash flow without the accounts receivable process.
The accounts receivable process has been and always will be a key business function, but with the current situation robotic process automation capabilities, can have an even greater impact on your business. Investing in AR automation will cost money, but not investing in AR automation will end up costing more in the long run. Don't leave money on the table.
