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.
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 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:
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:
The goals for accounts receivable department include:
Here’s a deeper dive into each of these five goals:
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
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
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)
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
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
An accounts receivable specialist is responsible for various tasks related to managing and tracking accounts receivable within a company. Their duties typically include:
Overall, an accounts receivable specialist plays a crucial role in maintaining financial accuracy, ensuring timely payments, and supporting the financial health of the organization.
Automate invoicing, collections, deduction, and credit risk management with our AI-powered AR suite and experience enhanced cash flow and lower DSO & bad debt