What is the Process for Accounts Receivable?

Accounts Receivable (AR) has a much bigger impact on your business than you might think.  It’s important for all business owners to fully understand the process, so that they can maximise cash and cash flow.  Instead of “hoping” people pay their bills, a wiser strategy is to establish, define and maintain an AR process to ensure that your company collects payment for the goods or services it provides.  An effective process for managing your receivables is the cornerstone of a healthy business.

A solid AR process can be broken down into four steps.

1. Establish your credit practices and policies

he best way to increase your Turnover Ratio, Days Sales Outstanding, Average Days Delinquent and other key AR ratios, is by only extending credit to credit worthy individuals and companies.  In this step you will decide the terms of credit, who qualifies, how much credit you will offer, etc.  It’s important for you to establish policies that work for your business instead of against it.

2. Invoicing Customers

An invoice is the document you send customers that explains what service or product was provided and the terms of when payment is due and how much.  It’s important that each invoice has a unique invoice number for easy documentation, tracking and retrieval.

Remember, the longer a company takes to send an invoice, the longer it takes to be paid.  So, it’s important to send invoices immediately after the transaction is completed.

3. Tracking Your AR

For larger companies, there is typically an Accounts Receivables (AR) Officer who tracks payments from customers, documents it in the AR system and allocates it to an invoice.  Then the AR team generally reconciles the AR ledger to properly account for and post all payments and finally they issue monthly statements to clients.

Smaller companies can often do this by themselves with basic accounting software but professional help is always beneficial and saves a lot of time and headaches.

4. Accounting for AR

The last step is generally a Collections Officer who identifies and accounts unpaid debts, bad debt, early payment discounts and more.

By following these four steps, you should have a solid AR process that helps your business stay healthy and cash flow positive.