The Accounts Receivable Process – a Step by Step Guide
If cash flow is the life blood of a business, it could be said that the accounts receivable process is part of the central nervous system.
The accounts receivable department manages the flow of revenue via the invoicing and collection process. From credit application to invoicing, follow-up and debt collection of late payments, the purpose of this business process is to provide healthy cash flow to support business growth and profitability.
What is the accounts receivable process?
The accounts receivable process delivers cash into the business, this is done via the invoicing and the collection process to bring payments in from goods or services sold. The purpose of this business process is to bring cash into the business before invoices are past due, or become bad debts – providing healthy cash flow to support business growth and profitability.
What does a successful accounts receivable process look like?
A successful AR process strives to bring in early payments where possible to support the balance sheet, and to minimise late payments through systematic monitoring and follow-up.
The art of optimising the AR process starts with credit applications from new customers, work is then done to determine their creditworthiness and set credit limits which encourage purchasing without credit risk. From here, the accounting system provides the information needed to send invoices, where automation of the invoicing process can really save time. Finally follow-ups to invoices sent encourage prompt payment of outstanding invoices.
Another AR process that is crucial to cash flow is aging reports, which are used to identify unpaid invoices beyond payment terms. These reports are used to chase overdue payments from each customer through the collection process. The more that payments can be collected as part of a seamless AR process, the less likely it is that a business will need to recruit third-party debt collection services.
Traditional accounts receivable vs. modern-day automation
The traditional approach to accounts receivable has been to manually generate invoices from accounting software or even excel spreadsheets in batches, sometimes daily. These invoices would then be printed and posted or, in more recent times, may have been emailed or sent via other electronic means. This approach typically relied on a manual process to verify payments and determine outstanding invoices for follow-up.
Manual follow-up and collections process typically involved print and post, supported by electronic reminders or phone calls. Overall, this was a time-consuming manual process.
The modern-day approach to accounts receivable takes output from ERP systems or accounting software via an invoicing platform, such as Corcentric EIPP, to automate the delivery of invoices. Modern invoice automation platforms can send invoices by post, email, or a range of other electronic delivery methods such as EDI or XML.
Electronic invoices simplify the payment process and give real-time visibility of the payment status to the seller. This is accomplished by embedding links to payments options in the invoice, including direct debit, credit card, and other online payment methods
It is the real-time visibility of invoice receipt and payment status that allows for further automation of follow-up, utilising alternative delivery methods if needed, and provides actionable insight for manual follow-up where needed.
Common accounts receivable challenges
Challenges in the AR process come down to assessing known risks. Credit applications present an early challenge in the life of an AR account. New customers must be carefully evaluated to set appropriate credit limits, to limit credit risk. These limits can be extended for valuable customers, or sometimes reduced over time if payment history or business status shows heightened credit risk.
Customer relationships are vital to any business and demand careful management from credit and collections teams. As they invoice, chase late payments, and negotiate payment plans or facilitate debt collection, receivable management needs to pay heed to customer experience management to strike the right balance.
Additionally, operational risks are commonplace in a typical AR process. Inaccuracies in manually produced invoices, delays in invoicing or follow-up communications, and late payments that go uncollected all have a direct impact on cash flow.
Pros and cons of automating the accounts receivable process
Assessing the operational risks of maintaining a manual AR process will provide the rationale for moving forward. Be clear and honest about current workflow and transparent about expectations for an automated system.
There’s nothing wrong with demanding a process that simplifies workflow, builds in economy, and also stabilizes – and possibly improves – cash flow. Consider the following:
- Streamlined workflow, save time and cost
- Improved accuracy of invoice content and delivery
- Ease of status reporting and real-time insight
- Scale up or down without headcount and training challenges
- Allow AR team to focus on higher-level work that requires a human touch
- Can involve lengthy/costly IT involvement if approached as an internal project
- Risk of disruption to invoicing and collections flow unless managed correctly
- Time/cost needs to be evaluated against savings – doesn’t suit low numbers of invoices
- Some solutions may limit how you can send invoices to specific content/formats/networks
Should you automate the accounts receivable process?
If your invoicing volume and complexity consumes too much time, you may want to consider automating this business process to free up resources for more valuable work. However, choosing the right solution or solution partner needs careful evaluation.
Many accounts receivable automation solutions require extensive setup and configuration time. The alternative is a managed service solution like Corcentric EIPP, where the technical complexity is outsourced to deliver on a specific set of business outcomes and is aligned with your AR process needs.
Before you evaluate e-invoicing solution partners, take a look at this list of key questions to ask to determine whether they fit your business requirements.
Whether you are trying to win back time from manually uploading to customers’ AP portals, or manage paper invoicing and electronic invoicing through one process, automation can streamline and save days of manual time each month.
Invoice automation solutions also increase accuracy of invoice content and delivery information. By pulling information directly from an ERP system or accounting software, you are removing the risk of copy-paste or other production errors.
Tips to create a flawless accounts receivable process
A flawless AR process requires attention to detail, as well as the scalability and accuracy provided by AR automation. Customers should be able to receive their invoices and follow-up communications in their preferred format across various media. Consider using templates to ensure all the necessary details are brought in, such as purchase orders and other order information.
Communications should retain a personal touch and provide an easy mechanism for buyers to request more information or assistance where needed. Handling exceptions before they impact cash flow is key to success.
Invoices are perhaps the least ignored communication businesses ever send, so ensure they express your brand values in both presentation and ease of use. Streamline the payment process and allow customers to easily access their invoicing and statement history.
Everything about your accounts receivable process should be timed to perfection, accurate, and easy to respond to. Furthermore, you should have complete visibility of where every communication and payment is and know where risks to cash flow are likely to arise before they do.
Moving over to automated accounts receivable
Automating your accounts receivable processes overcomes the vast majority of the common challenges outlined above, as long as the business is savvy about the transition. In order to streamline the deployment of automated processes without it becoming an IT burden, consider a solution partner such as Corcentric, which has a long history of delivering AR process improvements, automation, and electronic invoicing for clients across the globe.
Talk to one of our AR process experts today to find out why our clients rely on Corcentric EIPP to automate the delivery of over $245B in invoices each year. Together, we can optimise your accounts receivable processes and accelerate cash flow for your business.