What is Accounts Receivable Department and How to Streamline it?

Introduction

The finance function is composed of several different teams – treasury, accounting, accounts receivables, accounts payables, budgeting, financial planning & analysis, etc.

While all these teams play crucial roles, the accounts payable and accounts receivable departments are key to managing cash flow and working capital. The accounts receivable (AR) team is responsible for all cash inflows. They manage invoicing, payment collections, cash application, deductions, and credit risk.

The accounts receivable team is critical to ensure that your sales revenue translates into cash in your bank account. In this article, we’ll dive deeper to understand the intricacies of a modern AR department and how it functions.

What Does the Accounts Receivable Department Do?

The accounts receivable department within an organization is tasked with ensuring that all payments due to the business are received on time and processed promptly.

The traditional approach to accounts receivable has been to manually create invoices from accounting software or Excel spreadsheets. Later, these bills were printed and mailed, but more recently, they may have been sent by email or other electronic means. 

A modern approach to accounts receivable uses the output of an ERP system or accounting software through a billing platform to automate the delivery of invoices. This platform can send invoices by email or any other electronic delivery method, such as EDI and XML.

Accounts receivable departments also extend trade credit to customers, keep records of customers owing money to the business, enable collections, and post cash. Additionally, they may reconcile customer accounts and prepare aging reports to determine which customers are behind in making payments. They also use data to predict which customers are likely to default on payments and help build cash flow forecast models.

Accounts Receivable Department Structure

Accounts receivable department is an integral part of any business or organization. Different companies adopt different AR department structures. In smaller companies, all the functions can be handled by one person, but for a larger business, a typical AR Department can be structured around the following functions:

1. Chief Financial Officer (CFO) is responsible for financial planning, record-keeping, and financial reporting to other stakeholders. He/she is also referred to as the right hand of the CEO.
2. The Chief Accountant has many duties and responsibilities, mainly involving managing his accounting team and generating financial statements.
3. Management Accountants are risk managers, budgeters, strategists, and decision-makers. They do the work that helps the company’s owner, manager, or board of directors make better decisions.
4. Payroll & Fixed Asset Accountants look after the processing of all the organization’s payroll, paying taxes on salaries, deductions for pensions, and social security subscriptions.
5. Accounts Payable (AP) Officer is responsible for managing the accounts payable for the company. They reconcile supplier statements and verify the purchase orders if they are available or not.
6. Accounts Receivable (AR) Officer is responsible for managing the debtors and accounts receivables of the organization. They invoice their customers and follow up for payments.
7. Assistant Accountants generally look after petty cash deposits and check collections, as well as processing other journal entries.

Main Functions of an AR Department

Regardless of the size or organizational structure, the AR department plays a vital role in every business, overseeing a set of essential functions. With that in mind, let’s explore four key functions executed by the AR department. These are:

1. Building Monthly Financial Statements: This function involves the verification of receipts, reconciling bank accounts, etc., to prepare monthly statements that provide a concise overview of the business’s cash flow.
2. Performing Account Reconciliations: These activities are performed by an accountant at the end of an accounting period to ensure that the account balances in the general ledger are complete and correct.
3. Generating Invoices and Account Statements: An invoice is a document presented to a customer as proof of goods or services delivered. In some cases, the customer might pay for the items at the time of delivery, while in many cases, payment would need to be made at a later date. The AR team tallies the invoice amounts and adds them to the balance sheet as sales revenue, cash, or accounts receivable.
4. Managing the Billing System: A billing system is a process by which a company bills its customers. It includes electronic invoice templates, recurring invoicing workflows, payment software that automates the process of collecting payments, and mechanisms to track expenses and bills.

Goals of the Accounts Receivable Department

The goals for accounts receivable department include:

• Maximizing payment recovery for services or goods
• Vigilant tracking of overdue payments and mitigating bad debts
• Streamlined invoicing for clarity and transparency
•  Diligent dunning and collections management
•  Elevating the customer payment experience

Here’s a deeper dive into each of these five goals:

1) Maximizing payment recovery for services or goods

Efficient AR management aims to optimize the recovery of payments for the services or goods provided. The primary objective is to minimize the number of days it takes to collect payments (Day Sales Outstanding) and to reduce processing costs while simultaneously nurturing positive customer relations. 

This involves implementing strategies and technologies that streamline the payment collection process, ensuring a steady cash flow for the business while maintaining customer satisfaction.

Recommended Reading: 10 Powerful Tips for Collecting Accounts Receivable in the Modern Day

2) Vigilant tracking of overdue payments and mitigating bad debts

The AR team plays a pivotal role in monitoring and managing overdue payments to safeguard against bad debts. This entails employing measures to assess and minimize credit risk, promptly identifying delinquent accounts, and taking proactive steps to collect outstanding invoices. 

By efficiently tracking and addressing overdue payments, the AR department contributes to the overall financial health of the organization and ensures that revenue streams remain intact.

Recommended Reading: 5 Key Strategies to Efficiently Collect Outstanding Invoices

3) Streamlined invoicing for clarity and transparency

Invoicing is a fundamental responsibility of the AR department. They are tasked with the creation and delivery of invoices to buyers for the goods or services they’ve requested. These invoices serve as comprehensive financial documents, containing essential details such as the cost of products or services, itemized tax calculations, delivery dates, and more. 

Clear, accurate, and transparent invoicing practices facilitate smoother transactions, foster trust between the business and its customers, and contribute to improved cash flow management.

Recommended Reading: How to Streamline Your Invoicing Process

4) Diligent dunning and collections management

Dunning and collections are integral functions of the AR department, ensuring that outstanding debts are recovered effectively. This process involves collaborating with sales departments to gather customer and financial information, communicating with customers via phone or email to address payment issues, and establishing suitable repayment schedules. 

By using a systematic and customer-focused approach, the AR department can significantly reduce the risk of delinquency and improve the timely collection of outstanding balances.

Recommended Reading: How to Craft Dunning Emails (With Examples)

5) Elevating the customer payment experience

A paramount goal of the accounts receivable department is to enhance the overall payment experience for customers. Achieving this objective involves the strategic implementation of technologies and approaches that streamline payments, ensuring they are convenient, transparent, and devoid of hassles.

Recommended Reading: Top Benefits of Automating Your AR Process

How to Streamline Your Accounts Receivable Department?

Modernizing your accounts receivable department is essential for enhancing efficiency and productivity, ensuring a superior customer experience, and sustaining robust working capital levels.

Explore these strategies to streamline your AR operations.

1) Offer multiple payment options

While many companies still rely on paper checks for transactions, there is a clear trend toward increasing adoption of e-payment options for B2B transactions. Offering online payment methods such as ACH, wire transfers, and debit and credit cards is essential for providing a positive customer experience and modernizing AR departments. 

In fact, incorporating checks and paper invoices into electronic workflows makes your digital transformation efforts redundant.

2) Embrace electronic invoicing

Streamlining accounts receivable processes often begins with the invoice. An invoice is a document sent to a customer to describe the products or services they’ve purchased, the cost of those products or services, and the due date for payment. 

Each invoice is uniquely numbered, enabling the AR department to match receipts and payments with the correct customer. Adopting AI-based E-Invoicing improves trackability and enhances data management.

3) Document your standard operating procedures

An effective way to optimize the process is to document standard operating procedures, also known as SOPs. This approach reduces billing errors and streamlines the onboarding process for new hires in the accounts receivable department.

4) Incentivize timely payments

A great strategy to encourage customers to pay early is by offering a discount. For example, if the customer pays the invoice 14 days before the due date, a 2% discount on the final invoice can be provided. 

Conversely, you can implement late fees for delayed payments. Be sure to clearly mention these terms and conditions in the payment guidelines and on the invoice.

5) Track your invoices

This crucial step in the AR cycle is typically performed by an accounts receivable representative (ARO). The ARO’s primary role is to track all payments and notify customers when payments have been received. 

Large companies avoid this cumbersome process by using automated systems to monitor all billing and invoicing activities.

Benefits of Accounts Receivable Automation 

Streamlining your accounts receivable function is critical for managing everyday business operations. Automation can be your best bet here. 

According to our survey, nearly one-third of mid-sized businesses in the US are planning to automate invoicing, collections, and cash applications. Additionally, almost half of the businesses have already automated their invoicing function.

How can HighRadius help?

With HighRadius’ Autonomous Receivables Solution, businesses can greatly enhance their order-to-cash cycle. HighRadius offers credit and collection solutions that enable real-time credit risk tracking and up to a 75% faster AR recovery rate.

Our solution provides a prioritized to-do list, allowing collectors to target at-risk customers efficiently. Additionally, it utilizes real-time data to offer insights and reports, guiding the next steps for each customer account to maximize cash collection.

FAQs

1). What is the main responsibility of the accounts receivable team?

The accounts receivable team is a centralized team responsible for the timely collection of the accounts receivable portfolio and enhancing cash flow through the management of business systems and customer care.

2). What is the role of an AR analyst?

An accounts receivable analyst plays a vital role by meticulously examining accounts receivable transactions to ensure strict compliance with internal controls and accounting policies. Additionally, this skilled professional maintains and reconciles the accounts receivable ledger and generates comprehensive management reports that include detailed information about overdue accounts. This meticulous approach ensures accuracy and transparency in financial operations.

3). What is the best KPI for accounts receivable department?

Accounts receivable KPIs act as crucial metrics utilized to assess the efficiency of a company’s accounts receivable processes. The common AR KPIs include days sales outstanding (DSO), aging of accounts receivable, collection effectiveness index (CEI), bad debt ratio, and credit risk. The evaluation aids in optimizing financial operations and enhancing overall performance.

4). What does an accounts receivable specialist do?

An accounts receivable specialist is responsible for various tasks related to managing and tracking accounts receivable within a company. Their duties typically include:

• Creating and sending invoices to customers for products or services rendered.
• Ensuring that customer accounts are accurate by reconciling transactions, payments, and outstanding balances.
• Following up with customers on overdue payments, sending reminders, and facilitating the collection process.
• Managing and organizing accounts receivable documents and records.
• Generating monthly financial and managerial reports that provide insights into accounts receivable performance.

Overall, an accounts receivable specialist plays a crucial role in maintaining financial accuracy, ensuring timely payments, and supporting the financial health of the organization.