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Accounts receivable process

Updated on :  

08 min read.

Accounts receivable represents funds owed to the business by customers for sales made. The accounts receivable department is responsible for collecting accounts receivables of a business and plays a major role in channelling revenue into the business. Hence, following the accounts, the receivable process helps maintain a healthy cash flow to support the business.

Meaning of accounts receivable process

The accounts receivable process consists of steps and practices that businesses adopt to ensure timely revenue collection from their customers. This process starts from the point of policy establishment and ends with accounting for the collection of accounts receivables.

This process aims to bring cash to the business on time and invoices don’t become overdue. This directly helps maintain liquidity and promote the profitability of the business. A proper accounts receivable process helps identify the creditworthiness of customers and ensures payments are made promptly while maintaining healthy customer relationships.

Steps involved in accounts receivable process

A business must follow the steps mentioned below to optimise the collection of accounts receivables:

  1. Establishment of credit policies: The first step involves devising policies and procedures to be followed by the persons involved in collections. This sets a base for the sales and accounts receivable department on invoicing and collections. Businesses must invest time into this step since it can improve the efficiency of the forthcoming processes. The tasks that this step covers include:
    • Mechanisms to determine credit worthiness of the customers
    • Setting credit limits for different types of customers
    • Establishment of collection periods
    • Deciding on late payment penalties or early payment rebates
  2. Invoicing and documentation: Invoices are the main proofs of sales that act as a basis for the contract. Invoicing must be done in a way that provides clarity of transactional information to all parties. 
    • The business must be unique, detailed regarding the goods/services sold, and easily retrievable for future references. 
    • For the customers, it must specify credit terms, the value of goods/services sold, due dates for payments, and give options to different modes of payment. 

A quick invoicing process is a key to quick settlements. Hence, invoice creation and delivery processes must be accelerated. Businesses have recently adopted the e-invoicing system. Electronic invoices offer cost-efficient methods for invoicing since they offer convenience, quicker invoice generation, prompt delivery and invoice tracking.

(1) Tracking and monitoring accounts receivables: Regardless of the size, every business must undertake this step of the accounts receivable process. Once a sale is executed, the accounts receivable department takes over and monitors the accounts receivable. The accounts receivable personnel must review every account regularly, depending on the credit period.

This helps identify the probability of receipt of accounts receivables early. In case of any threats in realising any accounts, prompt corrective actions can be taken. Follow-ups are essential to the timely realisation of debts.

Specialised tools are used to monitor accounts receivables. Ageing reports show records of invoices that are outstanding, along with the duration. This analytical tool is handy to identify slow-paying clients and prevent bad debts.

(2) Receipt and accounting of receivables: Once payments are received, the accounts receivable department reconciles the receipt with the invoices and account balance. The department must punctually post-payment entries to the accounts to ascertain the remaining balances. The accounts receivable personnel will then take action regarding the balances.

Accountants are responsible for updating accounts for full settlements and making necessary adjustments for unpaid or bad debts. The team must record and account for all transactions accurately. Documentation is also an important aspect of accounting. Transactions must be supported with documentation to prevent malpractices or conflicts in the future.

Benefits of automating accounts receivable process

An efficient accounts receivable process is important to a business’s growth. A traditional accounts receivable process comes with its challenges like the following:

  • Manual workflows
  • Time-consuming resulting in delays, adding to costs
  • Exposure to mistakes and human errors

Automation of accounts receivable processes helps overcome the above challenges. Businesses can deploy software that automates the invoicing, tracking, and accounting of accounts receivables.

Automating the accounts receivable process has the following benefits:

  • Streamlined and efficient workflow prevents errors
  • Faster invoice generation and delivery
  • Status monitoring and reporting
  • Provides insights and transparency of operations to managers
  • Realtime accounting of transactions and updating of account balances
  • Documentation is maintained on the cloud, preventing data loss and ensuring the security
  • Useful for businesses that conduct operations remotely

Setting up accounts receivable processes can ensure that collections are made on time. An efficient accounts receivable process can have a better liquidity position, sales, and customer relations. Automating accounts receivable processes can make the task easier and help channelise efforts into boosting overall operations.