Glossary

Clearing Accounts

Clearing Accounts

Clearing accounts provide a temporary buffer to hold transaction details and funds. They remain in this area while financial professionals confirm each one and move them to their respective accounts. Consequently, clearing accounts serve as a centralized location to verify and reconcile transactions. Holding accounts, wash accounts, buffer accounts, and zero-balance accounts are some of the many other names financial professionals use.

Cash Application Process

Cash Application Process

When it comes to accounting, one of the most important, and often tedious tasks is ensuring that all payments received by a company are recorded correctly in the books. This process is known as cash application, and the A/R team can do it manually or through automation. So, what are the pros and cons of both methods? And, what are some best practices to improve the process?

Merchant underwriting

Merchant Underwriting

Merchant underwriting is one of the most critical elements of offering payment processing services to the right companies. It involves thoroughly evaluating a merchant's account to determine the level of risk a payment facilitator would undertake by working with it. Facilitators extend credit to cover charges before receiving the funds when processing payments. Consequently, they need to ensure they can trust the merchants they work with to fulfill their financial obligations.

Cash on delivery

Cash on Delivery

Cash on delivery is a payment method that allows customers to pay for goods or services when they receive them rather than upfront or 30 days later. This payment method has several benefits and challenges compared to other options. Is it the best method for your business? If yes, what are some best practices for implementing it?

Remittance Invoice

Remittance Invoice

Cash flow is one of the top concerns of businesses worldwide. Boosting income might seem like the solution to all problems, but accountants also need to know where to apply each payment. Remittance advice simplifies this by explaining why the payer sent the money. For example, it could go to a specific invoice, or the customer could want to apply it to a principal owed and not late fees.

Payment Redirection

Payment friction is widely acknowledged by sales professionals as the main factor influencing conversion rates. Payment redirection is one method that introduces friction by taking customers to another website to pay.

Invoice-to-Cash Flow

Cash flow is a top concern for businesses of all sizes. However, it can present a particular problem for small businesses. The invoice-to-cash flow process tackles this problem by establishing a detailed plan for collecting payments.

Dynamic Credit Score

Financial professionals often rely on credit score modeling to determine how much credit to extend. Some companies use static credit scores, while other companies use dynamic scores.

Debt Management Service

Debt management is one of the most critical tasks businesses need to handle. Proper management reduces bad debt and boosts cash flow. Some companies prefer to manage this task in-house.

Credit Risk

Credit risk is the potential loss that may occur if a borrower defaults on their loan. The failure to pay could result in the creditor not receiving the total principal or interest owed.

Advance Billing

Advance billing is one of the two methods companies use for invoicing customers. While arrears billing waits until customers accrue debt, an advance invoice involves sending a bill before completing the work or delivering products.

Aged Trial Balance Report

An aged trial balance report is a financial statement that lists all of a company's outstanding receivables from its customers. It sorts the information by how long each receivable has remained in past-due status.

Collection Scoring

Collection scoring is a process you can use to manage and understand your business's debt. This type of score model takes specific factors into account, such as collection accounts, average collection period, and amount owed.

Debt Collection Agency (DCA)

A debt collection agency is a company that specializes in collecting overdue or unpaid debts. Businesses often hire DCAs to collect outstanding payments from customers or clients.

Business Credit Reporting

A company's ability to access credit at reasonable rates depends heavily on its financial status and credit rating. Several companies provide business credit reporting services to help creditors determine creditworthiness and set eligibility limits.

Short-Paid Invoice

When a client doesn't pay the total amount of an invoice, it can seriously hurt your business finance. What is a short paid invoice, and what can you do about it?

Bad Debt to Sales Ratio

Accounts receivable is one of the most crucial functions of a business. It ensures that the company physically collects the revenue it makes on paper and does so in a timely manner.

ACH (Automated Clearing House) Payment

Implementation and follow-up practices determine how well ACH payments benefit your company. Failure to put proper systems in place can lead to human errors, security weaknesses, and some of the same problems that plague cash payments.

Credit Collection

Credit collection likely ranks among your least favorite activities as a business owner. Getting paid is excellent, but the process of collecting that money can feel overwhelming.

Proof of Debt

Proof of Debt

Proof of debt is needed when a customer owes you money and you may need to prove debt through the resolution process.

collection-risk

Collection Risk

Collection risk refers to the possibility that you will not receive payment for goods or services you already provided or delivered.

Invoice Matching

Invoice Matching

Invoice matching is the process of verifying that the invoice received from a supplier is accurate and corresponds to the purchase order placed by the buyer.

Outstanding Receivables

Outstanding Receivables

Receivables are the debts owed to your company. If you’ve agreed to do business by producing goods or services and collecting payments at a later date, you have outstanding receivables until the debt has been paid. 

Account Balance

An account balance is the total amount of money in a bank account or general ledger account. Accountants or banks usually calculate this by taking the sum of all deposits and subtracting all withdrawals.

Write-off

A write-off is an expense that a business can subtract from its taxable income or taxes. This reduces the amount of money it owes to tax agencies.

Balance Sheet

A balance sheet is a financial statement that shows the assets, liabilities, and owner's equity of a business for a specific period.

Unapplied Payments

An unapplied payment primarily refers to a payment that doesn’t have a matching invoice. In other instances, it might have a matching invoice but it hasn’t been settled.

PAYDEX Score

A business’s credit score can range from 0 to 100. The higher the number, the greater the likelihood of a business paying its bills in full and on time. Vendors and lenders review this information to determine eligibility for loans and trade credit.

Trade Receivables

“Trade receivables” refers to the total amounts owed to your company for the products or services sold to customers, but for which you have not yet received payments.

Notes Receivable

If your business provides credit to customers, then you likely encountered a notes receivable before. This promissory note details payment for a loan within a certain time period at a specific interest rate.

POS Transaction

POS is “point of sale.” The term does not specify the payment method but refers to electronic payments. In the past, this only included debit cards or credit cards.

B2B Credit Management

B2B credit management is used by B2B accounts receivable teams to distinguish between collecting payments from businesses vs. collecting payments from consumers.

Cash Flow Cycle

The cash flow cycle performance metric helps companies identify how long it takes to convert their inventories into cash. It measures this time in days.

Payment Facilitator

Payment Facilitator

Payment facilitator services simplify options for processing payments. Most PayFac companies focus on electronic payments, but some have even facilitated options for accepting checks and cash during online purchases.

Invoice Management

Invoice Management

Invoice Management refers to the management of your own business invoices. This internal business function requires the finance team to process and pay incoming invoices while also aligning payments with available cash.

Duplicate Payment

Duplicate Payment

A duplicate payment occurs when an entity makes an extra payment in the same amount as the original. This is usually caused by an accounting error or processing glitch.

Collection Policy

Collection Policy

A collection policy is an official strategy your business uses to meet and exceed its accounts receivable goals. This written document includes clear and detailed guidelines identifying who to extend credit to, how much, and why.

B2B Collections

B2B Collections

B2B collection refers to the process of collecting unpaid invoices or other forms of corporate debt. This debt can be sold to special agencies or business owners could hire professionals to handle the task.

Account Reconciliation

Account Reconciliation

Account reconciliation is the process accountants use to confirm the accuracy of the general ledger or other financial documents. In some cases, accountants complete this at the end of an accounting period, such as during year-end tax filings.

Cash Forecasting

The corporate cash forecasting process involves reviewing financial documents and completing complex calculations to predict how much cash the business will have at a specific date.

Collections Performance Metrics

Collections performance metrics refers to the group of calculations accountants use to monitor collection trends. By extension, these metrics also help managers determine how well accounts receivable teams carry out their jobs.

Collector Efficiency

Business owners and accountants can use several metrics to determine how quickly customers are paying their bills. Collector efficiency refers to the success rate of collecting debts owed.

Average Days Delinquent

Average days delinquent (ADD) refers to the average number of days that pass between due dates for invoices and the receipt of payment. Accounts receivable teams use this metric to evaluate client accounts and analyze payment delinquency across several accounts.

Receivables Turnover Ratio

Receivables Turnover Ratio

Managers use receivable turnover to measure the effectiveness of their accounts receivable team and how well they collect on invoices owed. That, in turn, helps managers determine how well they manage their assets, which includes company inventory.

Days Sales Outstanding (DSO)

Days Sales Outstanding (DSO)

Days sales outstanding shows the average number of days it takes a business to convert a sale into cash. Managers usually calculate DSO on a timed schedule, such as annually, quarterly or monthly.

Accounts Receivable Aging

Accounts Receivable Aging

The accounts receivable aging report categorizes a company's accounts receivable according to the length of time an invoice has been outstanding. The table lists all current customers, their balances, and how they are categorized. Companies can then use this information to determine how to proceed with collecting debts and whether it’s worth pursuing.

Cash Flow Statement

Cash Flow Statement

A cash flow statement is a financial document illustrating how money moves into, through and out of a business. It shows how much cash the company has on hand to pay its financial obligations and how much it keeps in reserves.

Dunning Notice

Dunning Notice

Also known as a dunning letter, this refers to a message sent to encourage customers to pay. These messages generally start out neutral and friendly and then become sterner as time goes by. In the past, these messages took the form of actual letters, but modern businesses use many different forms:

Average Collection Period

An average receivables collection period refers to the typical time it takes for companies to receive invoice payments. More specifically, it describes the time that elapses between the sales date and the date the customer paid for the goods or services rendered.

Order-to-Cash Cycle

The order-to-cash process refers to converting orders into cash payments for the business while fulfilling orders for customers. It is commonly abbreviated as “O2C” or “OTC” and covers the sales and fulfilment process from start to finish. While both B2C and B2B companies have an OTC process, it manifests differently.

Collections Representative

Also known as accounts receivable representatives, these professionals dedicate their efforts to ensuring customers pay their invoices in full and on time. Collections professionals are responsible for making phone calls, sending emails and taking other steps to ensure customers make payments.

Accounts Receivable Factoring

This type of loan allows business owners to pass the risk of payment on to another company. That creditor fronts the majority of the money owed so the business owner has cash in-hand to meet immediate obligations. The amount paid upfront depends on the industry and the risk associated with that industry.

Receivables Document Management

Document management provides the perfect solution for properly storing and organizing all your accounts receivable documents. Companies today need software to streamline their accounts receivable process. This turns most documents into electronic copies that become far easier to sort.

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