Accounts receivable departments are responsible for managing the movement of revenue by way of the invoicing and collection process. Beginning at credit application through to invoice processing, follow-up, and late payment collection, the purpose of this AR business process and mission of accounts receivable departments is to deliver a healthy and consistent cash flow. A cash flow that will support and maintain profitability and overall good business growth for the organization.
A recent study illustrated that over 30% of small- to mid-sized businesses in North America currently experience or expect to experience difficulties with cash flow directly caused by late payments. Cash flow issues that will negatively impact their ability to pay employees, suppliers, forecasted company investments and overall financial decision processing.
What is the actual accounts receivable cycle?
The main goal of the AR process: To receive cash owed for goods and services into the business before invoices are past due or before they become bad debt. Achievement of this AR goal will deliver, support and maintain the profitability and overall good business growth we discuss in the short summary above.
What’s considered a successful accounts receivable process?
To be considered a successful AR process companies must consistently bring early payments in whenever possible. The ultimate goal of these efforts is to consistently support the company’s balance sheet economics. This is accomplished by minimizing past due payments through efficient and continual monitoring and follow-up. Sounds simple, however, consistency and diligence are the make-or-break in AR processing. This is discussed in more detail in receivables reporting below.
The mechanics: The AR cycle involves a straightforward and continuous process for notifying clients and customers about the money they owe, when it’s due and to communicate early payment benefit incentives, if offered. A standard Accounts Receivable cycle might look something like this:
- Sales and delivery – Customer notification regarding the sale and delivery of a product or service
- Invoice generation– Once the receivables department generates the invoice in the accounting system it is then sent to the customer and triggers the collection timeclock.
- Payment collection – Typically customers have 30 days to pay, however, this can vary based upon individual payment arrangements
- Reconciliation with the accounting system – Process begins again as payment is collected or written off as a result of longer intervals of non-payment
Additional steps will include:
- Sending payment reminders mid-month and weekly intervals as collections are due
- Sending late payment reminders once in payment default
- Escalating the matter further for late payments
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