New accountants or business owner needs to know the basics of accounts receivable. This process plays an active role in the accounting cycle benefiting the accountant and the client.
For any good business, accounts receivables need constant monitoring to manage the cash flow and keep a careful eye on the money.
This article will inform you about the basics of accounts receivable management, why you need to know it, and what to expect from the process. With this knowledge, your business has a chance to succeed.
What Is Accounts Receivable?
If your company handles a list of clients, it becomes easy to lose track of payments and how much they owe you.
Accounts receivable management help in this regard. It controls the cash flow of your business and notifies you of unpaid invoices. In accounting terms, it's the money you receive from customers after selling goods or services.
This process gives you a clear view of your financial standing and helps you make potential changes to your business model. Knowing this gives you an understanding of the company's profitability and the overall income coming into the business.
Accounts Receivable Vs. Accounts Payable
If accounts receivable is the money customers owe you for goods and services, then accounts payable is the money you owe to vendors and suppliers.
Both of these concepts are important to the health of your business. Not only will you keep a better track of the company's money, but you can also prevent unexpected expenses.
Poor cash management is the leading factor for many failed businesses. Employers who don't know the principles of accounts receivable and accounts payable leave themselves open to bad deals and a lack of budget planning.
Accounts payable are more trackable than accounts receivable. You have control over when you pay the due amount to other vendors. It also lets you know when you rely too much on credit or overspending with vendors.
Accounts receivable are hard to track because you rely on the other party to commit to their dues. These terms last a couple of days to a year, and the longer the debt is outstanding, the more difficult it becomes to collect.
The Three Classifications of Receivables
Different types of receivables occur between a business and an organization. Depending on the company and service provided, the transaction follows a unique method that doesn't follow the traditional standards.
For example, merchant receivables break into two categories: trade and non-trade receivables. Trade receivables grow from the business, while non-trade receivables hold from sources besides the offer inside the standard course of commercial trading.
When it comes to standard transactions, three types of receivables take place. These include:
- Accounts receivable
- Notes receivable
- Other receivables
This receivable relies on record keeping and managing the number of receipts with each client. The sales happen through credit, and the payment period ranges from 1 to 2 months.
This receivable exists in the form of formal letters and other physical notes. With these types of loans, recipients have 2 to 3 months to pay back the bill with little to no interest. Any extensions of the payment period will lead to interest rates.
This receivable covers a miscellaneous category apart from accounts and notes. The type of receivables you can expect from this list includes interest receivables, salary receivables, employee advances, and tax refunds.
How To Process Accounts Receivable
It's not hard to process accounts receivable. Some consider it as easy as checking off a task from your checklist, but it can sometimes get overwhelming.
If you need a better strategy to keep track of your invoices, follow this guide for a quick rundown on how to process your list of accounts receivable.
Develop a Collection Plan
You should prepare a collection plan after the exchange of goods and services. You and the client should be on equal terms for how and when the money should be delivered.
When creating personalized invoices, try and understand the client's preferences. Some clients prefer a bi-weekly payment over monthly installments.
These are a few factors to consider when drafting a business agreement with your client:
- Payment History. Consider how often the client pays his dues. If they manage to pay their bills on time, your collection plan doesn't need to be strict. However, if you're dealing with clients with a track record of being late, keep those payment plans under supervision.
- Business Status. Is the state of your business in a good place? Can you afford to wait on payments? Knowing the operations of your company determines how strict the payment terms are. If you need the money back fast, don't hesitate to create shorter payment plans.
- Industry Standards. Knowing the industry's stance on payment terms can give you the upper hand with clients. You could offer better deals and time than competitors and build stronger clientele relationships.
Document the Collection Process
You may know the proper way to process accounts receivable, but what about the rest of your employees?
To establish an organized workplace, you should write the process as a formal document and post it somewhere for the entire staff to see.
Making a visual representation of your collection process reduces the chance of making errors and also helps with the onboarding process. New employees will enter the workplace knowing how to handle accounts receivable in the correct format.
Log Charges and Expenses Concurrently
Unless you have no time, scan all receipts, orders, and requests as they come in. It won't take long to place all the information under one folder and make a reminder to handle it when you have more free time.
Procrastinating on one client's receipt will lead to a bad habit until you end up with a pile of orders and delay the payment process.
Include Discounts and Sales
If your company offers special discounts and coupon codes with the service, make sure to include them when adjusting the payment plan. Forgetting to apply discounts can create a rift between you and the client.
The Importance of Accounts Receivable Management
Creating a clear process for your accounts receivable helps your business in many ways. Aside from just maintaining an efficient company, there are many benefits to keeping up with this type of account.
Managing your accounts receivable prevents delays and the daily functions of the company. When everyone understands their roles and responsibilities, the business succeeds and continues to promote excellent service to the customer and raise employee satisfaction.
The reason why managing your accounts receivable is smart is because you collect the money faster.
Early payback from suppliers and customers reduces company costs without letting go of good employees.
You also create a better image for your company and let potential customers know that the service you provide follows through with the entire process, including payment.
Improves Customer Experience
A big part of managing accounts receivable relies on the type of customers your business attracts. Most clients are more responsible than others, and it is your job to adjust payment plans accordingly.
Tracking these receivables and the frequency of payments helps the accounting department understand the clients to provide a better experience with their services.
Seamless Invoice Creation
In this new age of advanced technology, automated programs can help you process your accounts receivable.
Using an online system that records all client information saves you time and money.
When you find yourself in a position that keeps you busy from manually handling receipts, allowing an AI to help reduces the overflowing workload and employee stress.
Tips To Maintain Your Accounts Receivable
It may sound easy initially, but committing to your accounts receivable management can fall apart fast without the right approach.
These tips can help you keep track of your receivables.
Communicate With Your Clients
Keep up with your clients from beginning to end and establish a strong working relationship. There's no reason for the conversation to be strictly about business.
Poor communication with your clients reflects badly on yourself and the company's ability to establish clear payment terms.
Create a Solid Internal Process
You should develop a schedule for processing the accounts receivable. It helps separate tasks for different days and reduces the workload.
You can have one day consist of keeping up with late payments and another day dedicated to processing new requests. It all depends on your work schedule and preferences.
After processing the payments, you can send a follow-up message to confirm the receipt. There are cases where errors occur and leave both parties in confusion.
You could also use this time to gather feedback on the product and service.
You never know when you might need to trace back to that information so always keep a folder for accounts receivable. Keeps detailed notes about the order, conversation points, and agreed-upon terms.
Accounts receivable management can help you oversee your company and your lifestyle. It is a common business practice that helps keep your finances in order and increases the money flow.
Using the best methods and accounts receivable software, you can easily control your financial trouble.