Accounts Receivable or the AR process is the key to receive payments from customers. Businesses use it to manage the cash inflow and their collection process for the good or services they have already sold.
To be able to handle the AR efficiently it is important that your Finance and accounting team knows the keys to handle each and every step effectively. They also have to be capable of collecting payments on time and innovating and developing latest strategies. They should also be upbeat when it comes to the best practices about maximizing their cash flow. Further they need to have a thorough knowledge of all aspects of AR, cash application, contact administration, collections and credit management to be able to operate in a holistic manner.
According to some research results the receivables constitute 2/5th to 1/3rd of the total balance sheet and yet most companies end up not managing this process effectively. The risk management is often not proportionate to the importance, even though it significantly affects the bottom line of all businesses irrespective of their segment, domain or any other factor.
The AR processes are actually important because, they affect the entire cash flow of the company. Further they also can become a bottleneck for the entire bookkeeping and ledger processes. So, it is often preferable that a business constantly monitors.
The process has multiple steps like:
- Credit decisions
- Billing and Bill Distribution
- Receipting, Allocations and Reconciliations
- Dispute Management
- Bad Debt
Credit Decisions – This step includes checking whether or not the prospective customer has sufficient credit worth to get the products or services supplied to him under an account arrangement.
Bill Distribution and Billing – This happens after the services / goods have been provided to the client. The customer usually completes the payment once the invoice is generated, but at times they also pay when they are ready to.
Receipting, Allocations and Reconciliations – This step is handled by an AR Officer. They identify a payment that’s deposited into the bank account of the supplier. Then they receipt it into the system, and allocate the payment to the relevant invoice. Following this is the reconciliation to make sure that it is a correct payment.
Collections – All invoices that are unpaid or short paid are identified by the collections officer at any given date. This might also include sending reminders to the customer and receiving the payments as and when, or as per the company / business policy.
Disputes Management – Typically, this step is managed between the collections officer and the customer, if the clients / customers dispute an invoice or a bill. However, in some businesses (largely B2C models), there can be dedicated dispute handling teams.
Bad Debts – Any debt is observed for a certain time frame or a date. If a debt reaches beyond this debt and / or is disputed and no mutual resolution is agreed upon (to the satisfaction of the supplier), then the bad is put into the bad debt category.