Accounts Receivable Series #2 The Cycle

Mar 1, 2023

Key to success of the AR process is for businesses to set clear and realistic expectations for managing this cycle. For example, the average payment cycle in the US is 31 days, with larger companies taking 1 ½ to 2 times longer. As a result, businesses must carefully track every receivable payment status in order to plan for covering operational costs if delays in receiving cash could threaten maintaining the proper balance.

Establishing credit: Efficiently optimizing AR begins with the credit application.  Assessments are made to determine the customer’s creditworthiness, then set limits on the amount of credit extended – realistic limits will encourage  purchasing while mitigating the seller’s credit risk.  Information from the accounting system provides the information needed to create and process invoices.

AR Aging: Vital to AR processing is accounts receivable aging, a.k.a. receivables report. This is an intermittently produced report categorizing a company’s accounts receivable according to the length of days an invoice has been outstanding (unpaid). It is used as a measurement tool to assess the financial health of an organization’s customers. If the aging report indicates that receivables are being collected significantly slower than normal, this can be a warning sign that business may be slowing down or that the organization may be assuming greater credit risk in its sales practices.  The more that payments are collected as standard AR practice, the less likely the business will need to enlist outside debt collection services.

Accounts Receivable on the balance sheet: AR is recorded on a company’s balance sheet as a current asset, indicating the account balance is due from the debtor customer in a year or less.

If it takes a receivable longer than a year for the receivable account to be converted into cash, it is usually recorded as a long-term asset or a “notes receivable” on the balance sheet. Under the accrual basis of accounting and FASB (Federal Accounting Standards Board) rule, the account is offset by an allowance for questionable accounts, since it is fairly possible that some receivable accounts will finally be assumed as bad debt e.g. never be collected. This allowance is estimate of the total amount of bad debts related to the receivable asset.

Manual processing and its impact

Although more invoicing may now be electronic, the entire process typically remains a dated, time-consuming and manually-based process:

  • Printing and posting invoices
  • Invoice delivery – physical and electronic
  • Verifying payments
  • Determining receivables requiring follow-up
  • Follow-up collections processing – notifications, reminders and physical communications
  • Proper closeout of payments in the accounting system

The most important document that initiates and drives payments is the invoice.  If this part of AR processing is inefficient or disrupted for any reason, this can create a serious impact to the company’s financial health.  Accuracy in invoicing is also an important issue, adding time and manual efforts to correct and reissue the invoice. And having to demystify invoice data to approve payments not only adds additional time to receive needed payments, but creates an unnecessary and possibly damaging irritation for customers.

By working with an intelligent B2B platform like eTreem your organization can minimize the cost of processing credit cards and realize savings in your bottom line. Contact us to find out how