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A Complete Guide for
Accounts Receivable
Process
Efficient management of the accounts receivable process is important in preserving a
stable cash flow and guaranteeing the economic resilience of a company. The accounts
receivable denotes the sum owed to a company for goods or services provided on credit and
requires careful attention to various essential actions, including setting credit terms and
ensuring prompt payment collection. In this guide, we will conduct a comprehensive
examination of the complete accounts receivable process, along with best practices to
underscore the significance of effective accounts receivable management.

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» What is Accounts Receivable?
Accounts receivable (AR) refers to the money a business is owed for goods or services it has
provided but has not yet received payment for. When a company sells products or services on
credit, the amount customers owe is recorded as accounts receivable. This money is expected
to be paid within a short period, usually within a year, making AR a current asset on the
company’s balance sheet. In simple terms, accounts receivable is the total amount customers
owe a business for purchases made on credit. It is crucial for managing cash flow and ensuring
the company has enough funds to operate smoothly.
» Process of Accounts Receivable: Step-By-Step
The accounts receivable process is essential for maintaining a healthy cash flow, supporting
business growth, and ensuring profitability. Here’s a straightforward AR beginner’s guide to
help you understand and implement an effective accounts receivable process.
• Establish a Credit Application Process
Before extending credit, it’s crucial to determine how and to whom you will offer it. Implement a
credit application process to gather necessary information for evaluating a customer’s
creditworthiness. This process might include:
– Contact Information: Name, address, phone number.
– Credit History: Credit checks and references.
– Employment Information: For individual customers.
– Business Information: For companies, including accounts payable contact details.
– A well-structured credit application ensures that you make informed decisions about
extending credit.
• Develop a Collection Plan
Creating a collection plan involves agreeing on payment terms with your customers. This
includes:
– Payment Frequency: Monthly or weekly billing, depending on customer preference.
– Terms and Conditions: Clear documentation of payment due dates, late fees, and
interest rates.
– Business Agreement: This formal document outlines the responsibilities of both parties,
including payment timelines and consequences for late payments.
– A detailed collection plan helps maintain consistent cash flow and reduce the risk of late
payments.
• Ensure Compliance with Consumer Credit Laws
Compliance with consumer credit laws is mandatory. The Federal Trade Commission
(FTC) enforces regulations to protect consumers. Key compliance points include:
– Interest Rate Disclosure: Clearly communicate any interest rates applied.
– Billing Disputes: Respond to billing errors promptly.
– Debt Collection Practices: Follow legal guidelines for debt collection.
– FTC Regulation Practices: Staying updated with FTC regulations ensures your
accounts receivable process is legally sound.
• Send Out Invoices
Invoices are a critical part of the accounts receivable process. Each invoice should
include:
– Invoice Number: Unique identifier.Date: Clearly displayed.Business Details: Names
and addresses of both parties.
– Description: Detailed account of goods or services provided.
– Amount Due and Due Date: Total payment required and the deadline. Digital
invoicing can streamline this process, making it more efficient and reducing the risk of
errors.
•
Implement an Accounts Receivable Management System
Adopting an accounts receivable management system is beneficial, especially for larger
businesses. This system:
– Tracks Invoices and Payments: Keeps records of all transactions.
– Generates Reports: Provides insights into outstanding invoices and cash flow.
– Automates Tasks: Sends automatic reminders for due payments. An automated
system enhances efficiency and accuracy in managing accounts receivable.
• Monitor the Collection Process
Regularly tracking the collection process is vital. Conduct an invoice aging analysis to
categorize invoices by their overdue period (e.g., 0-30 days, 31-60 days). This helps in:
– Identifying Overdue Invoices: Focus on collecting older debts.Estimating
– Bad Debt: Anticipate potential losses.
– Taking Action: Follow a structured policy for pursuing late payments, including the
possible involvement of collection agencies.
• Real-Time Logging of Charges and Expenses
Log all charges and expenses in real-time. Use accounts receivable software to:
– Scan and Upload Documents: Attach receipts and orders directly to the
corresponding invoices.
– Update Records Instantly: Ensure all transactions are recorded promptly. Real-time
logging improves transparency and accuracy in financial records.
• Offer Early Payment Discounts
Offering discounts can encourage customers to pay early. This can be stated on the
invoice or included in the business agreement. Early payment discounts also improve
cash flow.
• Maintain Strong Customer Relationships
Building and maintaining good relationships with customers can enhance the accounts
receivable process. Regular, friendly communication helps ensure that customers are
more likely to pay on time. Customer satisfaction should always be a priority.
• Plan for Escalation
Despite best efforts, some customers may not pay. Have a plan for escalation:
– Follow-Up: Reach out multiple times via different communication channels.
– Demand Letter: Send a formal notice if necessary.
– Collections Agency: Consider involving a collections agency for unpaid debts.
– Payment History: Decide whether to continue business with delinquent customers
based on their payment history.
» 7 Services Offered in Outsourced Accounts Receivable
• Credit Management
Outsourcing firms assess the creditworthiness of customers to determine appropriate
credit limits and terms. This service helps minimize the risk of bad debt and ensures that
credit is extended to reliable customers.
•
Invoice Generation and Distribution
Outsourcing providers create and send invoices to customers promptly and accurately.
This includes electronic invoicing, which speeds up the billing process and reduces
accounting errors.
• Payment Processing
These accounts receivable services include efficiently handling incoming payments and
ensuring they are recorded accurately in the AR ledger. This reduces the chances of
discrepancies and improves cash flow management.
• Collections Management
Outsourcing firms implement systematic follow-ups on overdue accounts. They use a
combination of automated reminders and direct contact to encourage timely payments
and reduce the number of outstanding invoices.
• Dispute Resolution
Professionals handle any disputes that arise from billing issues. They work to resolve
these disputes quickly, ensuring that payments are not delayed due to
misunderstandings or errors. When you outsource accounts receivable, these experts
can efficiently manage and resolve disputes, further ensuring timely collections.
• Reporting and Analysis
Accounts receivable outsourcing companies provide detailed reports and analysis on
the accounts receivable process. These reports help businesses understand their cash
flow status, identify trends, and make informed financial decisions.
• Reconciliation
Regular reconciliation of accounts ensures that the records in the accounts receivable
ledger match the actual payments received. This process is crucial for maintaining
accurate financial records.
» Benefits of Outsourcing Accounts Receivable
•
Improved Cash Flow
Outsourcing the accounts receivable process ensures that invoices are sent promptly and follow-
ups on overdue accounts are handled efficiently. This leads to quicker payments and a more
consistent cash flow.
• Cost Savings
By outsourcing, businesses can reduce the costs associated with hiring and training in-house
staff for AR accounting. Outsourcing firms provide skilled professionals who can more effectively
manage the accounts receivable process.
• Enhanced Efficiency
Outsourcing firms use advanced technologies and best practices to manage the AR process.
This results in fewer errors, faster processing times, and improved overall efficiency.
• Focus on Core Activities
When businesses outsource accounts receivable, they can focus more on their core activities,
such as product development and customer service. This allows for better resource allocation
and enhances overall business performance.
• Access to Expertise
Outsourcing providers are experts in AR management. They bring a wealth of experience and
knowledge to the table, ensuring that the accounts receivable process is handled professionally
and in compliance with relevant regulations.

https://www.investopedia.com/terms/a/accountsreceivable.asp

» 10 Key Terms in Accounts Receivable Process
Understanding the key terms in the accounts receivable process is crucial for
managing your business finances effectively. Here are some important terms of AR
accounting explained in simple words:
• Accounts Receivable Turnover Ratio
This ratio measures how efficiently a company collects its receivables. It is calculated by
dividing the net credit sales by the average accounts receivable during a period. A higher
ratio indicates an efficient collection of receivables.
•
Invoice
An invoice is a document sent to customers to request payment for goods or services
provided. It includes details such as the amount due, due date, and a description of what
was sold.
• Credit Terms
These are the conditions under which credit is extended to customers. It includes the
payment due date and any discounts offered for early payment.
• Days Sales Outstanding (DSO)
This metric shows the average number of days it takes to collect payment after a sale. A
lower DSO indicates a faster collection of receivables.
• Aging Report
An aging report categorizes outstanding invoices by the length of time they have been
overdue. It helps businesses identify which invoices need immediate attention.
• Bad Debt
Bad debt refers to amounts that are unlikely to be collected from customers. These are often
written off as a loss.
• Collections
This is the process of pursuing payment from customers who owe money. It includes
sending reminders, making phone calls, and possibly involving a collections agency.
• Credit Memo
A credit memo is issued to a customer to reduce the amount they owe. It is often used to
correct an overcharge or return of goods.
• Reconciliation
This is the process of ensuring that the amounts recorded in the accounts receivable ledger
match the actual payments received.
• Write-off
A write-off is the accounting action taken when it is determined that a receivable will not be
collected. It is removed from the accounts receivable balance.