Accounts Receivable Process: 5 Steps for Improving

The accounts receivable process is one of the most important systems in a company. Businesses can only operate with reliable income, and that income depends on the efficient processing of customer payments. Here are five tips that can help you make that happen.  

1. Automate, Automate, Automate!

Automation is the accounts receivable department’s best resource. Many of an AR department’s key processes are routine and mechanical, such as:

  • Updating customer accounts
  • Submitting invoices for approval
  • Recording payments as received
  • Sending payment reminders

When you automate these simpler tasks, members of your AR team have more time to handle complex and customer-facing tasks like negotiating payment terms and resolving customer disputes. More face time with buyers means a more connected customer base, and connected customers are increasingly likely to show brand loyalty

2. Formalize the Credit Approval Process

Do you have guidelines that sales teams have to follow when extending credit to customers? If not, you may be paying the price in reduced revenue. 

According to professional services and accounting group Deloitte, many businesses incentivize sales in ways that encourage sales reps to offer extended payment dates, discounts, and excess credit. This can easily result in a customer base that routinely pays late, putting the company’s balance sheet in jeopardy.

AR departments have the power to interrupt this vicious cycle by establishing formal credit approval rules and procedures. Sales and finance teams should be part of the development process, primarily so that the rules will be reasonable and based on transaction size.

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For example, you may choose to set strict requirements like credit report analysis and background checks for large accounts, but a pre-set checklist may be enough to qualify customers for smaller lines of credit. Set as many procedures as you need for different buyer levels, and review them regularly to make sure they’re appropriate and competitive.

Make sure there’s accountability on your end as well. Set a time limit on approving or rejecting credit applications. If you’ve told sales that you’ll turn around credit requests in X number of days, they’ll quote that number to their customers.

Use your automation capabilities here, too. Send automated reminders if approval is coming due, so clerks can follow up in person or by phone if necessary.

3. Centralize and Audit Customer Data

A smooth accounts receivable process is only possible if your customer records are accurate and up-to-date. Inaccurate customer accounts lead to invoice errors, lost bills, and more late payments.

Don’t assume that your customer data is accurate because it’s in a spreadsheet. On average, 10% to 20% of all customer files go out of date in a given year, and it’s too easy for this information to be lost or miscommunicated.

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Automation can help you here too. If your customer information is already in an automatically updated database, great. Chances are good that it’s current, especially if you have the system set up to update a record when information changes.

If you don’t have a database like this, start by auditing your data. Go through all of your customer information looking for red flags like:

  • Duplicate records
  • Records with the same name but different addresses
  • Outdated payment agreements
  • Atypical credit limits or payment arrangements
  • Unexplained discounts

Pay particular attention to trends of inaccuracy. If you have one product line that has a higher rate of duplicate records or non-approved payment arrangements, track the inconsistency to its source. Find out how you can improve record-keeping to reduce the rate of error.

4. Act Fast on Past-Due Invoices

Late payments cost companies big money. A study reported by American Express in 2019 shows that the average small to medium-size business has lost up to $43,000 solely because late payments have forced owners to turn down projects. Late payments also mean that businesses struggle to pay their own employees and vendors.

You can’t stop customers from paying late, but you can become more proactive about collecting. Establish a timeline for following up, starting with the first call or email after the invoice has passed its due date. 

Automation is particularly helpful with this task. Draw up email templates to go out at regular intervals, starting no more than a day or two after the invoice’s due date. In each one, remind the customer of the amount due, including any late fees, and remind them of any additional fees that may be upcoming.

Have a contingency plan in place for what happens if clients still don’t pay. Draw up another email template to go out after what is a reasonable amount of time for your business, gently reminding them that default may lead to legal action. 

No one on the AR team has to remember to send those messages, Say goodbye to “forgotten” accounts—an automated system won’t forget to email a delinquent client.

5. Refine the Cash Application Process

It’s important to spend time reducing your late-payment rates, but don’t lose sight of your on-time payments. Cash application is easily overlooked within the accounts receivable process flow, mostly because it seems at first glance to be simple. Payment comes in, you apply it to an account, and it gets recorded as paid.

If something goes wrong in cash application, though, you can end up spending a lot of time and money fixing it. New invoices need to go out, the system needs to generate new reports, and so on. You’ll be much safer establishing a formalized cash application process.

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First, establish the expectation that payments be applied to the appropriate account and invoice on the day they come in. Deloitte recommends this as a norm so that you always know which accounts are pending, due or late. 

Next, set up a schedule for reconciling accounts. Maybe this will happen monthly, bimonthly or less often—it all depends on your staff and how many invoices you take in regularly. Be clear about who is involved in this process and establish a procedure for resolving unidentified receipts and invoices so that they don’t linger.

Automated reminders are very useful when establishing these kinds of norms. If you have notifications that go out when it’s time to review a payment or reconcile an account, these steps will become habit faster.

A Final Word

A well-run accounts receivable department is essential to a healthy company. It’s not easy to keep track of the many moving pieces involved in AR, but an automated accounts receivable processor and defined accounts receivable process steps can get you most of the way there. The rest is up to you and your team.

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