Accounts Receivable Process: What Is It, and How Does It Work?
What you need to know about the accounts receivable process and its workflows, plus how to identify opportunities to optimize your own process.
The accounts receivable process is a core element of the finance process. Here we explain what the accounts receivable process is, how it works within financial operations, and how to create and improve your own accounts receivable process.
What is the accounts receivable process?
The accounts receivable process deals with suppliers providing goods and/or services to a buyer on credit, with a legal agreement requiring that the buyer provide payment for the goods or services by the agreed upon date. Depending on the supplier and/or reliability of the buyer, a payment agreement can require the buyer to pay in full within 30, 45, or 60 days.
To illustrate how the accounts receivable process works, think of an IOU or a loan — something is received or provided today, but payment isn’t due until tomorrow or much later.
|Quick tip: According to an Atradius Payment Practices Barometer, the average payment duration in the US is 57 days.|
Why is the accounts receivable process important?
Whether it’s a misplaced invoice, a missed deadline, a paper trail of documents, or a human error due to manual processing, a bottleneck in the accounts receivable process can be detrimental to a business.
The accounts receivable process is an important part of a company’s financial operations because it provides a quick glance at a company’s financial health, and serves as a way to analyze and measure a company’s liquidity.
Accounts receivable at a glance
|$3 trillion||Total amount US companies are owed in outstanding accounts receivable |
|$16-$22||Cost of manually processing individual invoices |
|42%||Amount of B2B payments paid via paper check |
|$3B||Expected market size of accounts receivable automation by 2024 |
|43%||Number of overdue B2B invoices in the US |
|6 days||Average time spent manually processing a physical invoice |
|4%||Total uncollectible B2B receivables in the US |
How does the accounts receivable process work?
The accounts receivable process begins when a buyer places an order. From there, like a domino falling, this action triggers the following steps:
- The supplier receives the buyer’s order and confirms the purchase of goods and/or services.
- The supplier sends the buyer an invoice. The invoice will include details like when the payment is due and any early-payment discounts or late-payment fees.
- The buyer pays the supplier for their goods and/or services.
- The supplier receives the payment.
- At this point, the supplier applies any discounts incurred and documents the buyer’s updated total payment.
- After that, the supplier will create a final report detailing payment.
While the example above details a best-case scenario where payment is provided on time, a fully formed accounts receivable process also accounts for bumps in the accounts receivable process, like a late payment or uncollectible payment.
Here’s what a dynamic accounts receivable end-to-end process looks like in action:
|Best practice: Before you get start building out your accounts receivable workflow, be sure to complete the following:|
• Determine the triggering event that kicks off the process and the desired result.
• Create the aging schedule, or due date ranges, for your accounts receivable aging report. This will help you keep track of your cash flow and track the impact of late payments.
• Identify deviating flows specific to your company’s accounts receivable process.
• Establish early payment credits and late fees. Many companies offer an incentive to pay quickly, such as: pay within 15 days and we’ll deduct 5%.
• Define KPIs to track the effectiveness of your accounts receivable process. Some KPIs to keep in mind are the collection effectiveness index — which measures the effectiveness of payment collection efforts — and the accounts receivable turnover ratio — which measures how long it takes to collect payment in order to gauge how well companies manage the credit they extend to buyers.
4 tips to improve your accounts receivable processes
Once you begin mapping out your accounts receivable process, consider the ways you can improve it. Here are three tips to get you started:
- Lose the papertrail. Research by PYMNTS, a global leader for data, news and insights on innovation in payments, found that 72.4 percent of companies still receive invoices via post, and another 43.8 percent receive invoices via fax machines. This is a costly and time-consuming mistake for businesses.
- Automate tasks. Take the guesswork out of product orders, issuing or following up on invoices, and collaborating with other teams. With automation, you can reduce human errors and eliminate repetitive manual work, guaranteeing that there’s one less task to worry about and more time to focus on growing your business.
- Streamline the order and invoice process with templates. Using a template, or a customizable online form, ensures that the correct information is collected and provided each and every time.
- Optimize the accounts receivable process with a business process management (BPM) platform. With a no- or low-code BPM, you can run an error-proof accounts receivable process (and lots of other processes), improve productivity, and gain control of your deadlines, collection attempts, and payment verification — all without little to now dev work.
Integrate your accounts receivable software with a BPM platform to solve common problems
The accounts receivable process may seem like a very tedious process, but accounts receivable software can take the guesswork out of managing your business.
Whether you’re a small business or a large enterprise, it’s common to use software to manage the accounts receivable process. Commonly used software that can be integrated with Pipefy includes FreshBooks, Netsuite, QuickBooks, SAP, and XERO.
By integrating your accounts receivable software with a BPM, you can take the guesswork out of managing your business and improve the reliability of your financial operations by centralizing and automating critical tasks, like invoicing and payment collection.
Now that we’ve broken down the accounts receivable process and how to improve it, keep reading to learn more about the benefits of business process automation and how a BPM platform can help automate your business processes.