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What Is the Accounts Receivable Process?

Your business is built around a number of foundational pillars. Sales, marketing, accounting: They all play an important role in supporting day-to-day operations, and each serves to help your business grow and thrive.

One of the most important elements of any successful business is the accounts receivable process.

Accounts receivable (A/R) refers to all the outstanding invoices you have yet to collect. It’s an integral piece of your business puzzle. The accounts receivable collections process is the term used for cataloging and collecting payment for those invoices.

You can’t operate, let alone grow as a business without an efficient, effective A/R collections process. Understanding what it is and how to maximize its potential helps businesses big and small thrive in a crowded marketplace.


A Traditional Accounts Receivable Process Workflow

A traditional accounts receivable process begins when a customer makes a purchase for a product and/or service (think of accounts receivable as an “IOU”) and ends once the outstanding payment has been collected. An accounts receivable workflow is the step-by-step process taken to record and collect the debt.

Often, a company’s A/R collections method is less a straight line and more of a circle because the process begins all over again when the customer makes a new purchase. Reliable, repeat customers can remain within the collections process until they stop doing business with you, which could be years or decades down the road.

An A/R collections process flow might look something like this:

  1. Sales and delivery – Communication with customer regarding a product or service resulting in sales/delivery
  2. Invoice – A/R department sends invoice to the customer
  3. Payment collection – Customer typically has 30 days to pay
  4. Reconciliation – Process begins again as payment is collected or written off

Extra steps could include:

  • Sending payment reminders mid-month
  • Sending late payment reminders
  • Escalating the matter further if the customer does not make payment

Again, it’s common for repeat customers—especially those that purchase a wide range of products or services from you—to have many invoices working through the A/R collection process.

Tips for Optimizing Accounts Receivable Management

It’s one thing to understand what an accounts receivable collections process is. It’s another to make the most of your own procedure to ensure prompt payment and efficient operation.

These tips can optimize your accounts receivable collections process:

1. Establish a Collections Database

The days of paper and pen invoicing have long been out of style. Improving your collections process starts with implementing a digital collections system and establishing a database.

Modern accounting database and automation solutions come equipped with all kinds of tools you can use to maximize collections potential and minimize accounting mistakes.

2. Maintain a Standard Aging Process

Typically, you want your customer to pay within 30 days, but you’ll have clients stretch beyond this boundary.

It’s helpful to establish “buckets” for invoices to track how long a bill has been outstanding. Timeframes commonly include 0-30 days, 31-60 days, 61-90 days and 90+ days.

You’ll use different collection strategies for invoices in each timeframe collection bucket. Having invoices segmented effectively will help your A/R team know which strategy/call/reminder needs to be sent and when.

3. Prioritize High-Value Accounts

Accounts receivable success is all about reliable cash flow. You can maximize ROI when you prioritize high-value accounts. Ensure your staff focuses most on the invoices that make up the bulk of your outstanding receivables.

That’s not to say some invoices aren’t important. All of them are. But some invoices need more attention and collection savvy than others.

4. Automate Your A/R Process

Keeping track of endless invoices and managing collections can be overwhelming and costly. That’s why many businesses implement some form of accounts receivable management automation.

Automation means chasing late payments with invoice reminders and collecting outstanding bills don’t have to be all-day, everyday tasks. Let your accounts receivable team focus on more important tasks by automating trivial-but-critical collections processes.

Analyze, Optimize and Automate to Improve Your A/R Process

Improving your accounts receivable management doesn’t have to be a long, costly process. For many businesses, implementing an account receivable automation platform drastically improves the A/R process almost overnight.

The right platform or partner helps you understand challenges and opportunities, so you can optimize your current A/R process with direction and confidence.

Not sure where to start?

Contact the accounting automation experts at Gaviti today, and we’ll work with you to identify and eliminate your accounts receivable inefficiencies.

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