Accounts receivable is the money owed to a business by its customers for products or services that have been delivered but not yet paid for. Essentially, it’s the company’s outstanding invoices or what clients need to pay. The good news is that businesses with efficient AR processes can see up to a 30% reduction in payment cycles. In fact, businesses can achieve a 48% increase in cash flow predictability and reduce bad debts.
This blog will provide a step-by-step guide to managing your AR process with best practices. Isn’t it exciting?
1. Customer Initiates an Order
The accounts receivable process officially begins when a customer places an order for your product or service. This step is crucial because it sets the stage for the rest of the process. Ensure all the details are documented, whether the order is made online, over the phone, or in person. This will help avoid misunderstandings later on.
2. Customer Onboarding and Credit Check
Before you issue an invoice, it’s crucial to assess the customer’s creditworthiness, especially for new or high-value clients. Extending credit without evaluating risk can result in delayed or non-payments, directly impacting your cash flow.
3. Setting Up Clear Payment Terms
Once the customer’s order is confirmed and credit is approved, it’s time to set clear payment terms. These terms should specify how long the customer has to pay, what payment methods are accepted, and any incentives for early payments or penalties for late payments. Here is how you can do it.
4. Generating and Issuing Invoices
After the order has been fulfilled, the next step is to create and send the invoice. A professional, clear, and detailed invoice will make it easier for your customer to pay promptly.
5. Tracking Payments and Monitoring Due Dates
Once the invoice is sent, it’s important to keep track of its status. Many businesses run into trouble by letting unpaid invoices pile up without a proper system.
6. Sending Payment Reminders
Even with clear terms and due dates, some customers will forget or delay their payments. That’s where payment reminders come in handy.
For example, you might say, “This is a courteous reminder that your invoice is overdue. We kindly request that you arrange payment as soon as possible.
7. Managing Collections for Overdue Payments
If your reminders are ignored and the payment is overdue, it’s time to initiate a formal collections process. This step can be tricky, but it’s essential to have a plan in place.
If the payment remains significantly overdue, you might want to consider involving an Accounts receivable management agency. Outsourcing to a professional agency can help you recover the outstanding amount faster and maintain a positive customer relationship. These agencies are experienced in handling overdue payments delicately, ensuring the process is professional and respectful.
8. Writing Off Uncollectible Debts
Despite your best efforts, there may be situations where a debt becomes uncollectible. When all attempts to collect the payment fail, you’ll need to write it off as a bad debt. This process involves removing the receivable from your books to accurately reflect your financial standing.
Writing off bad debts allows you to clear your accounts of uncollectible amounts, ensuring your balance sheet reflects accurate data. It also helps with tax reporting since bad debts may be deductible. This step should only be taken after exhausting all collection efforts, including contacting the customer, sending final notices, and possibly involving a collections agency.
9. Payment Processing And Reconciliation
Once a payment is received, it needs to be properly processed to reflect in your financial records. Payment processing includes verifying the payment, updating the corresponding invoice, and ensuring the payment matches the terms agreed upon.
10. Dispute Resolution
Occasionally, customers may dispute an invoice due to errors, misunderstandings, or dissatisfaction with the product or service. Dispute resolution is the process of addressing and resolving these issues to prevent payment delays or damage to customer relationships.
Transform Your Business with FBSPL’s Pro AR Management Solutions
Now that you understand the key steps in managing accounts receivable, are you still feeling drained by late payments or stretched thin with limited resources? If so, let FBSPL handle the heavy lifting. From generating spot-on invoices to automating payment processing, we take the hassle out of managing your accounts receivable so you can excel in other business areas!
