Managing accounts receivable is oftentimes a vital process for businesses to strengthen their financial health and discover their full potential.
September 28, 2022 
Accounts receivable is a type of current asset recorded in the balance sheet, representing the amount of money due to a company within the short term.
They are generated whenever a business allows its customers/clients to purchase their products or services via credit.
AR shares some similarities with accounts payable, except that accounts payable is defined as the money a business owes to third-party operators.
The health of a corporation’s accounts receivable can be determined by studying the accounts receivable ratio and the number of days sales outstanding (DSO).
It is a fairly common practice for companies to deliver their products or services prior to receiving payment from their customers. This practice enables customers to bypass the inconvenience of having to make payments upon each transaction. Nonetheless, companies must manage their cash flow in a vigilant manner in order to prevent running dry on the necessary capital to fund their business operations.
With that, managing accounts receivable is oftentimes a vital process for businesses to strengthen their financial health and discover their full potential. For the majority of firms, the process of managing accounts receivable is costly and involves a lot of manual protocols, thereby making it vulnerable to human error. Cases such as overlooked or missing invoices are common issues that risk a company’s cash flow.
On that note, Kolleno is a smart credit control platform dedicated to aiding businesses in overcoming such problems by developing healthy accounts receivables management at the core of their payment strategies.
The term “receivable” refers to the payment balance that a company has yet to realise and is part of a firm’s working capital. On the other hand, “accounts receivable” is the money a business owes its customers/clients for the products and services it has delivered but has not received payment for. A firm records this as a current asset on its balance sheet. The accounts receivable process includes invoicing customers, tracking payments, and recording all completed transactions.
Additionally, business owners can use accounts receivable as collateral when applying for a bank loan, as they are recognized as a type of liquid asset. Consequently, customers are legally obliged to settle all outstanding accounts receivables with the company within a year or less. In many cases, the line of credit extended by a firm usually ranges from a couple of days to a calendar or fiscal year.
Conversely, a business’s debts to third-party operators, like suppliers, are called “accounts payable,” contrasting with accounts receivable. Businesses consider accounts payable a liability because it signifies the money owed to other entities.
To provide an example, consider a scenario where Company A has offered strategic consulting services to Company B and sent an invoice for its work; Company B thereby owes company A money. As a result, Company B will need to record the bill in its accounts payable section. Meanwhile, Company A has yet to receive Company B’s payment, so it has to record the invoice it has sent to its accounts receivable column.
To begin with, an example of accounts receivable would be a cleaning company that bills its customers after washing their carpets. The cleaning company would list an account receivable for the unpaid bills while waiting for its client to settle their invoices.
Other than that, another example of accounts receivable would be a consumer goods manufacturer that has sent its products to a retail store. Upon billing the store for the goods, the manufacturer will record the overdue invoice as an account receivable, awaiting payment from the retail store.
Evaluating a business’s fundamentals involves considering accounts receivables, indicating its capacity to settle short-term debts without external cash.
Therefore, there are several benefits that businesses may enjoy from managing their accounts receivables well, including:
-A healthier cash position,
-Greater insight into the company’s overall cash position,
-Lowered processing expenses,
-Shorten the period for the order-to-cash cycle, and
-Improved customer relationships.
Business analysts assess a company’s accounts receivable turnover ratio, determining how often it settles its balance during a specific period. Additional methods include calculating days outstanding (DSO) and finding the average time for a company to collect payments post-transaction.
There are various risks a company has to take note of if they possess a high accounts receivable balance. Risks include customers filing for default, resulting in uncollected payments becoming bad debts. Inadequate cash flow, a rise in doubtful accounts, and a prolonged sales cycle can occur when customer credits are exhausted.
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Still, companies can employ strategies, like using automated solutions as a best practice, to maintain healthy account receivables. These practices offer the company deeper insight into their accounts receivable, enabling better management tactic development.
There are a few steps in the order-to-cash cycle of the accounts receivable procedure, beginning with:
Usually, the accounts receivable professional collaborates with internal legal counsel or a third-party law firm for advice and invoice generation.
After delivering products/services, the accounts receivable professional bills customers for the owed money. Then, you can Send the invoice manually by mail or digitally (e.g., email or customer portal presentation). However, businesses typically strive for the prompt generation and delivery of bills to their customers, considering these tasks time-sensitive. In short, prompt bill receipt accelerates debt settlement, leading to faster cash realization for businesses.
Customers generally opt for the most convenient payment method when paying the business. Such methods could include wire transfers, virtual credit cards, paper checks, or automated clearing house (ACH) payments. The company must choose acceptable payment forms and set up the required technology for the process. This ensures that the business can maximise its efficiency in receiving money from its customers via their preferred payment channels. Companies must balance meeting customer payment preferences with internal considerations, as different channels involve varying costs and efforts.
After the money arrives in the company’s account through various payment channels, the company must apply cash to the accounts. This implies that the company must mark the specific amount of cash received as “paid” in the customer’s invoice.
On that note, while this concept seems relatively straightforward on paper, real-life situations might complicate things. Companies, dealing with numerous monthly payments, need specialists to match each cash transfer with specific invoices.
Consequently, applying the received cash sooner enables a company to deploy it for operational purposes more quickly and reliably. Additionally, replenishing customers’ credits sooner allows them to purchase more products and services.
Failure to make the agreed-upon payment by the due date will label the account as delinquent in the system. Therefore, the credit controller must contact customers to encourage debt settlement. In many cases, it entails sending reminders or understanding customers’ reasons for bad debts and finding ways to facilitate payments. If necessary, the credit controller might resort to involving a collection agency to settle the customer’s debts. Outsourcing to a collection agency should be an exception, not a routine part of the company’s procedure.
The duration for each transaction varies depending on the industry vertical the business is operating in. Nevertheless, companies should regularly manage accounts receivables. With that, there are several practical tips for companies to stay on top of their receivable process:
Businesses often fail to communicate effectively with their customers and/or vendors in the first 60 days after delivering their products or services, leading to a common cause of unpaid invoices. Therefore, companies must regularly maintain contact with their customers until they fully settle their bills.
In essence, choose an accounts receivable process to be standardised across the firm, delegate the tasks amongst the employees, and stick to it. Such protocols include the day of the week to send the invoices to the customers and the schedule to follow up on customers who are exceeding their payment-term window.
To aid businesses in this process, the Kolleno platform is crafted for managing the firm’s credit control and receivables. Companies can concentrate on core operations while maintaining positive customer relationships.
Most businesses usually do not face difficulties getting their customers to confirm the successful delivery of their invoice within one week of receiving it, so it should be part of a company’s best practice. Not to mention, following up to confirm receipt also presents an opportunity for the business to seek customer feedback on its product and service, showcasing its solid after-sale customer service capabilities.
Companies could opt for getting their customers to apply for a credit line to ensure that both parties have clarity on the payment terms and conditions. This, in turn, enables the firm to properly assess its payment ability and thereby establish a credit limit that it is comfortable with before extending it gradually once the client has built sufficient trust with them.
As a rule-of-thumb, documenting your accounts receivables is an excellent way to assist your bookkeeper with completing the monthly inputs for the company’s financial statements and help your accountant during the tax season. This is critical to protect the company if the worst-case scenario occurs. Any paper-based documentation will require you to chase the customer for payment via a collection agency or court.
In the older days, companies had to recruit more AR professionals to increase their management capacity. This consequently led to higher overhead costs that may be counterproductive to the firm’s bottom line. In addition, businesses may begin to encounter more complexities as they expand, which may lead to issues such as:
-More frequent human errors,
-Poor customer experiences,
-Inefficient work streams despite a larger AR department.
Still, today’s AR professionals benefit from several technological advances. They have access to accounts receivable software that can automate many of the manual and repetitive tasks associated with managing a company’s receivables. Besides that, specific accounting software may also provide businesses with an in-depth insight into their accounts via:
-Creating reports,
-Providing a single source of truth through providing a centralised customer invoice database, or
-Highlighting potential issues that necessitate further attention.
Besides that, certain accounts receivable accounting software may employ machine learning to automate some more complicated tasks. Moreover, some software also can suggest the relevant tasks that accounts receivable professionals should prioritise to increase their work efficiency.
On that note, whether you are a company founder, a finance director, or a financial controller, Kolleno is a software extension that connects the user to popular accounting software such as QuickBooks or Xero. This feature, in turn, enables the accounts receivable professional to completely automate their accounts receivable management process. Moreover, one can consider Kolleno’s invoicing feature, which constitutes the essence of the accounts receivable management process, as the industry’s gold standard.
All in all accounts receivable management is no easy feat as it requires a lot of smooth coordination between the company and its customers. Nonetheless, it remains a critical process to master if the management team intends to strengthen the company’s cash flow and overall financial health. As a result, investing time and resources into proper accounts receivable management is, without denial, a necessity for the long-term survival of a business.
Accounts receivable is a type of current asset that gets recorded on a company’s balance sheet. It represents the amount of money customers owe the business in the short term.
An example of an accounts receivable is an electric corporation invoicing its customers after delivering the electricity to them. Upon the successful delivery of its product, the electric company would record the unpaid invoices as accounts receivable as it waits for the customers to settle the bills.
Accounts payables are the company’s short-term liabilities, whilst accounts receivables are the money the firm expects to recover from its customers.
