In order to ensure smooth operations of every business, it is important each and every aspect related to business functions properly. Some essential elements such as marketing, sales, accounting are an integral part of any business operation and play a significant role in developing and growing the business. Apart from these factors, the accounts receivable process is another crucial aspect that ensures the success of a business.
Accounts receivable (A/R) means the amount a firm or an organization has to collect from other businesses or services. Due to this reason, it is an important part of any business area. The term ‘accounts receivable collections process’ refers to categorizing and managing the finance for pending invoices.
With the absence of the A/R collections process, it becomes hard for businesses to operate and thrive effectively. With a good understanding of this subject, a small or big business can open the doors of success despite heavy competition.
What Does Traditional Accounts Receivable Process Mean?
Let us understand how this process works. A traditional accounts receivable process starts once an individual purchases something (a product or a service) and halts as soon as the outstanding payment is achieved.
With the help of accounts receivable workflow, businesses can track each record and debt collection step by step manner.
The collection process starts all over again when the customer makes a purchase. Therefore, it can be said that the A/R collections method is more like a circular process rather than a straightforward one.
As a result, repeat customers always remain a part of the collection process unless they wish to stop purchasing from the business. However, this usually doesn’t happen until years of purchases have been made.
A sneak peek into Accounts Receivables collections process flow:
1. Sales and delivery – In order to convert individuals into customers, it is important to establish good communication with them regarding the business’s products or services.
2. Invoice – After purchasing the products, an invoice is sent to the customer, highlighting the product details and the amount to be paid.
3. Payment collection – Customers usually have a period of 30 days to pay for the purchased product.
4. Reconciliation – Once the customer has made the payment, the entire process starts again.
Extra steps also include:
- Sending payment reminders to the customers in the middle of the month
- Sending reminders at a later-stage
- Taking the matter forward in case the customer fails to make the payment. This is usually common with repeat customers, specifically those who have bought a range of products. These customers have several invoices under process.
How to Make Accounts Receivable Management System Better?
Anyone can understand the process of accounts receivable collections. After all, it isn’t that hard to understand, especially for a business. However, using that information to create a unique procedure for your own business is an entirely different thing.
Here are some tips that can help you optimize your accounts receivable collections process:
1. Create a Database
If you are still using the older pen and paper style to run your system, ditch it immediately. The first step to improve your collections process is to make the entire process digital and create a database.
With the presence of modern technology, automated software offers various kinds of tools that can easily increase any business’s potential of the collection while also reducing the number of mistakes in terms of accounting.
2. Establish a Standard Aging Process
Businesses usually want their customers to clear off the pending payment within a span of 30 days. Still, there are instances where this may not always happen, and you’ll have to provide an extended time period to your customers.
To tackle this problem, it is advised that you create a list of the time an invoice remains outstanding. Common timeframes include 0-30 days, 31-60 days, 61-90 days, and 90+ days.
Depending upon the timeframe, you’ll know which strategies to use in order to receive the collection. With proper segmentation in place, the A/R team knows which reminders to send and how.
3. Give Priority to Valuable Accounts
The success of accounts receivable is dependent on only one factor, i.e. reliable flow of cash. Therefore, make sure that you focus on those invoices that are the reason behind your high outstanding.
However, this doesn’t mean that you shouldn’t focus on other invoices. It’s all that some particular invoices need special attention at times than others.
Conclusion
You don’t necessarily have to spend huge amounts in order to optimize your accounts receivable management system. You can simply start with an automation platform that can significantly contribute to the success of your system.