Accounts Receivable

Sample footer text

Agenda
 Introduction

 What is Accounts Receivable?

 What is the Accounts Receivable Process?

 Why is the Accounts Receivable Process

Important?

 Accounts Receivable Process Steps

20XX 2
Sample footer text

Introduction
If you’re involved in finance or run a business, you know that
accounts receivable isn’t merely a line item on your balance sheet.
It’s essential for maintaining a healthy cash flow, which is crucial for
your business’s sustainability.

Yet, managing it effectively can be a complex task fraught with

challenges—from delayed payments to reconciliation errors.

20XX 3
Sample footer text

Introduction
In this practical guide, we’ll walk you through what accounts receivable is, accounts
receivable process steps, and the key performance indicators for successful accounts
receivable procedures.

Additionally, we will be sharing free accounts receivable templates with you to make
implementation easier. Let’s get started.

Before we jump into the accounts receivable process, let’s clarify what accounts receivable
is to make sure we know the basics.

20XX 4
 What is Accounts Receivable?

Accounts receivable refers to the outstanding invoices your company has, which represent
the money owed to you by customers for goods or services that have been delivered but not
yet paid for.

Think of it as a short-term IOU from your customers. Managing accounts receivable

effectively is crucial for cash flow, as it represents revenue that you’ve earned but haven’t
collected. It’s an asset on your balance sheet that you’ll want to convert into cash as quickly
as possible.

20XX 5
 What is the Accounts Receivable Process?

The accounts receivable (AR) process is a systematic set of actions that businesses follow to
invoice clients, track payments, and collect funds owed for goods or services provided. It acts as a
connection between sales and revenue, ensuring that transactions are completed through timely
payments.

This process is essential for converting sales into actual revenue, which is vital for the financial
health and growth of a business.

To fully understand the process, you need to be familiar with all the steps, which we will cover in
detail in the ‘Accounts Receivable Process Steps’ section.

20XX 6
20XX 7
 Why is the Accounts Receivable Process Important?

• The accounts receivable (AR) process is far more than just a set of administrative tasks; it’s a critical
component of your company’s financial health. While the core activities may seem straightforward—

1. Sending out invoices

2. Managing collections

3. Processing payments

4. Posting them to your Enterprise Resource Planning (ERP) system

• Each of these tasks can be highly intricate, especially if your AR team is navigating manual workflows.

• It’s not merely about keeping tabs on individual transactions; in the broader context, the AR process is
about cultivating ongoing relationships and securing a consistent cash flow.

20XX 8
 Accounts Receivable Process Steps

20XX 9
 Accounts Receivable Process Steps

• Step 1: Customer Order Placement

• When a customer decides to make a purchase, they’ll typically send a purchase order. Upon approval, a sales order
is generated, which serves as a binding agreement detailing the goods or services, their quantity, price, and other
terms of the sale. Before proceeding, it’s crucial to assess the customer’s creditworthiness.

• Step 2: Credit Approval

• Before you even send out an invoice, it’s crucial to assess the creditworthiness of your customers. This is
especially important if transactions involve significant sums and extended payment terms.

• A thorough credit application process is essential to assess the credit risk associated with each customer. Based on
your company’s credit policy, you may approve or deny credit, or suggest alternative payment methods. Also, this
process may vary depending on whether it’s a new or existing customer.

• New Customers:

• Implement a credit application process that aligns with your company’s documented credit policy. This process
20XX may take a few days and should assess the customer’s financial stability and payment history. 10
 Accounts Receivable Process Steps
• Existing Customers:

• Periodically review the credit terms for existing customers, especially if their order volume increases or their
payment behavior changes. This ensures that you’re not exposing your business to unnecessary risk.

• Step 3: Invoice Dispatch

• An invoice serves as the definitive record of a customer’s purchase, outlining how much is owed and the
payment due date. The quicker you can send out the invoice, the sooner your payment terms begin, so it’s
beneficial to automate this step as much as possible.

• Step 4: Collections Management

• Late payments are an unfortunate reality. A structured collections process helps in following up with customers
who have overdue invoices. The frequency and nature of these follow-ups can vary based on the customer’s
payment history and the amount due.

• Below are some time frames commonly used by companies for carrying out their collections outreach:

20XX 11
 Accounts Receivable Process Steps

20XX 12
 Accounts Receivable Process Steps
• Step 5A: Writing Off Uncollectible Debts

• When you’ve exhausted your outreach efforts (including passing off the debts to a collection agency or legal counsel)
and determine the payment is uncollectible, you’ll write off the receivable as bad debt.

• The timing for this can vary by industry and should be in line with your company’s financial policies. For some
industries, like transportation services, for example, an average days sales outstanding (DSO) of above 50 days is
normal. If late payments are common in your line of work, it makes sense to wait before writing off an invoice as bad
debt.

• Step 5B: Payment Processing

• Business buyers pay their invoices in several ways, including:

• ACH or EFT

• Wire transfer

• Debit, credit, or virtual card

20XX 13
• Checks
 Accounts Receivable Process Steps
• Efficiently processing these payments is essential for accurate financial records.

• Businesses that want to accept payments online will need a payment processor, payment gateway, and at least one
merchant account, not to mention a platform to support e-commerce or self-service customer payments. Some payment
service providers will wrap all of this up into one offering.

• Most B2B businesses still accept a significant volume of paper checks, with a recent survey by AFP pointing to 92% of
organizations continuing to use checks for incoming payments. To support this, businesses will often resort to managing
multiple lockboxes (where a bank receives, and processes checks for you).

• Note that although lockbox services eliminate the need for you to receive checks at your office, they don’t take away the
effort involved in processing them. Going through lockbox files to apply payments to invoices still takes work.

20XX 14
 Accounts Receivable Process Steps
• Step 6: Cash Application

• Once a payment is received, it needs to be posted to the corresponding invoice(s). However, this process can sometimes
be challenging due to factors such as missing remittance advice or discrepancies between the provided payment
information and open invoices.

• Step 7: Dispute Resolution

• Invoice disputes can delay payments significantly. If a customer raises an issue, it’s crucial to initiate the dispute
resolution process promptly to prevent further delays and maintain good customer relations.

• Customers will often pay the portion of their invoice that’s not in dispute (a short payment), which adds another layer of
complexity for your AR team. They’ll have to confirm why the short payment happened, whether it was for a valid
reason, and how to apply the payment in your accounting system.

20XX 15
 Accounts Receivable Process Steps
• Step 8: Reporting and Analytics

• During the month-end close process, your finance team will check that they’ve recorded all transactions and put
the closing balance of all general ledger accounts into a report (a trial balance). This allows you to put together
financial statements for that period to report to the rest of the company.

• Regular reporting on the status of your accounts receivable is crucial for financial planning and for assessing the
effectiveness of your AR process. Metrics like Days Sales Outstanding (DSO) and Collections Effectiveness
Index can provide valuable insights.

20XX 16