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Accounts Receivable Process (Cycle): Step-by-Step

26 September, 2022
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What you'll learn

  • What is the accounts receivable process?
  • What are the steps involved in the accounts receivable process?
  • What does a traditional vs. modern accounts receivable process look like?
  • What are some tips and best practices to optimize the AR process?
  • How can HighRadius help automate your AR process?
CONTENT
What is the accounts receivable process?
What are the steps included in the accounts receivable process?
What does a traditional vs. modern accounts receivable process look like?
What are some tips and best practices for optimizing the accounts receivable process?
How can HighRadius help automate your AR processes?
FAQs
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Accounts receivable (AR) is a crucial component of any business’s balance sheet. It provides an indication of the volume of trade credit a business extends to its customers.
The AR cycle involves many steps right from the onboarding of a new customer till they place an order and pay for it. So, understanding this process is critical for optimizing it and ensuring that the business’s cash flow is not hampered.

Businesses that figure out ways to smoothen this cycle have a healthy cash flow, lower DSO, and are able to unlock new growth opportunities. In this article, we will take a step-by-step look at the accounts receivable process and see how businesses can optimize it.

What is the accounts receivable process?

The accounts receivable process involves customer onboarding, invoicing, collections, deductions, exception management, and finally, cash posting after the payment is collected. There are a lot of other steps involved as well, like bad debt management, writing off accounts, etc. The goal of the accounts receivable team is to strengthen the business’s cash flow.

For most businesses that offer credit, accounts receivable make up the majority of their balance sheet. So, business owners must take the accounts receivable process seriously and ensure that they convert the majority of their AR to cash in a timely manner.

What are the steps included in the accounts receivable process?

steps included in the accounts receivable process

The accounts receivable process may vary from company to company and also between industries. Here we will take a look at the common steps included in every business’s AR cycle.

1) Customer onboarding

Businesses often have a thorough credit check process when onboarding new customers to understand their creditworthiness and allot credit limits. They fetch business credit scores from credit agencies and might ask for trade references as well. Businesses also use automated credit risk software to track real-time changes in their customer’s credit risk.

Applicants with a good credit history are given a higher limit and lenient payment terms compared to those with a poor credit score and a history of delayed payments. This is the step at which credit terms are finalized and shared with the customers.

2) Receive orders and send invoices

Once a customer has been onboarded, the next step is to take their order and send them an invoice. This is a crucial step because the invoice clearly states the payment terms and the due date for the order. Every invoice also has a number, which is matched against the remittance when the customer makes the payment.

A lot of businesses have moved to e-invoicing today because it’s fast, efficient, and much cheaper than paper-based invoicing.

3) Collections

Collecting payments is often considered the most crucial phase in the AR cycle. Businesses can be either reactive or proactive in terms of their collections. The collections strategy impacts how much of the receivables a business is able to collect. In a proactive approach, businesses prioritize accounts based on their credit risk and follow up with them before the payment due date. This reduces the number of delinquent accounts.

This process, when done manually, can take a lot of time and isn’t that effective. Automated solutions like RadiusOne Collections app, helps AR teams increase productivity using auto-prioritize collections worklists at the start of each day. This enables them to identify and target at-risk customers and reduce the chances of bad debt.

4) Cash reconciliation and posting

After the customer makes the payment, businesses need to find the remittance data and match it with the invoice. Once that’s done, the invoice is closed, and the cash is posted. However, this step can take a lot of time because analysts have to manually collect remittance data from web portals, check stubs and emails, and match them against the invoice.

There are also exceptions when a customer overpays, pays for multiple invoices at once, or underpays for some reason. Solving such problems may take a lot of time, but automating the cash reconciliation process can help minimize manual efforts and improve productivity.

What does a traditional vs. modern accounts receivable process look like?

Traditional accounts receivable process involves manual data entry on Excel/spreadsheets and is inefficient, time-consuming, and error-prone. Due to this, the cost of a traditional accounts receivable process is high, and businesses are keen to shift towards modern solutions.

To check if your business follows a traditional accounts receivable process, answer these questions:

  • Are invoices generated manually via apps like MS-Excel or MS-Word?
  • Does your business send customers e-invoices or paper invoices?
  • Does your collections team have a streamlined workflow for payment collections?
  • After a customer makes a payment, is the remittance information collected manually and matched against the invoice?

If the answer to any of the above questions is yes, then you are following a traditional AR process.

In contrast, a modern accounts receivable system is automated and handles most tasks without manual intervention. It reduces errors and allows employees to focus on high-value tasks, leading to improved productivity.

Some clear signs that you’ve adopted a modern-day AR process include:

  • Automated real-time credit checks
  • e-Invoicing
  • Prioritized collections
  • Zero-touch cash posting
Read more on this topic here – Traditional vs. Modern AR Solutions

What are some tips and best practices for optimizing the accounts receivable process?

tips and best practices for optimizing the accounts receivable process

Businesses can optimize their accounts receivable process by following the industry best practices and tips mentioned below.

1) Be clear with the payment terms

After the credit check is completed and the customer places an order, be clear about the payment terms in the invoice. If there is confusion regarding the due date or late payment fees, the payment may be delayed. This will affect the cash flow and DSO of the company. 

2) Track and optimize AR metrics

It is important to understand that optimizing accounts receivable is not an overnight activity. Since it involves a lot of processes, you need to optimize each of them. But how do you know it’s working? Assign KPIs to different processes and track them to see if there is an improvement. For example, the KPI for collections could be the average collection period.

3) Periodic credit checks

A one-time credit review is not the best way to manage risk. In this turbulent economic environment, businesses doing well today might be on the verge of bankruptcy tomorrow. So, it is important to keep track of their credit well-being. If any account is identified as high-risk, they need to be classified as at-risk customers, and collectors should prioritize the account for collections. The credit limit also needs to be reassessed in such a scenario.

4) Post payments on time

If your business receives a payment from a customer, do not delay the posting process. Adding transactions to the balance sheet immediately reduces errors and also makes things easier for analysts during the monthly closing process.

Check out our AI-based cash application solution for automated remittance aggregation and cash posting.

5) Collect proactively

Businesses that are reactive in their collections approach are likely to report higher DSO and bad debt compared to peers who use a proactive collections approach. The collections team needs to be particular about the customers they follow up with. They should prioritize high-risk customers and avoid calling accounts that have already paid.

6) Automate the AR process

Following the tips above can help you make your accounts receivable process a lot smoother. But, they are not that easy to implement when you are manually doing everything. Automation is the key to implementing these best practices effectively, and improving your AR process.

How can HighRadius help automate your AR processes?

Cash is key for every business, and managing your account receivables effectively is the only way to have a good cash flow. To enable this, businesses must automate their accounts receivable process and move away from manual methods.

Research from PYMNTS.com shows that 87% of companies that have automated their AR processes are processing faster. 75% of businesses also report being able to offer an improved customer experience after automating their AR.

HighRadius’ RadiusOne AR Suite can help you optimize your accounts receivable process by automating credit, invoicing, collections, and cash reconciliation processes. It enables businesses to fast-track customer onboarding, post-cash with zero intervention, and boost collections.

FAQs

1) What is the account receivable cycle?

The accounts receivable cycle starts with the customer buying a product or service on credit and ends when the business collects the payment and records the transactions on its balance sheet.

2) Why do we need to track accounts receivable?

Accounts receivable make up the majority of a company’s balance sheet and are essential for a company’s cash flow, financial stability, and liquidity. This makes tracking accounts receivables important.

3) How do you monitor accounts receivable?

Monitoring accounts receivables can be tricky, but as a business, you can track important KPIs like DSO, bad debt ratio, and CEI to monitor your accounts receivable process health.

4) Why do we manage accounts receivable?

Businesses manage accounts receivable to ensure that their customers pay on time and they are able to have sufficient working capital for their daily operations. It also reduces bad debt.

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