Accounts receivable best practices to improve business performance
Accounts receivables are an indispensable part of your business’s cashflow. Read on to learn the best practices that can finetune your accounts receivable management to run at top speed effortlessly.
What is accounts receivable and why is it essential for your business?
When you sell a good or service to your customers on credit, the value of those sales is known as accounts receivable. This means that when you send a payment invoice, you do not receive cash for it right away. Rather you receive it at a later date; or in case you have a routine credit sale with a particular customer, you receive cash at the end of the credit period.
Companies that do not keep track of their accounts receivable and do not impose any policy tend to suffer a lot when it comes to maintaining a positive cash flow. Furthermore, an important part of your financial statement is built by accounts receivable: the balance sheet.
Accounts receivable ensures a steady cash flow to the business and assists in building strong credit relationships with customers that could even lead to better deals and improving the cash flow management.
Types of accounts receivable
To understand how accounts receivable works, you must first understand its elements.
Cash
Cash is the total amount of money your business currently possesses. Cash is the best working capital. It is liquid and easily utilized and it is always good practice to have ample cashflow in the business to ensure proper operational workflow.
Inventory
All the raw materials or goods you have purchased to be converted into a finished product is also an asset to the company. You can resale these items to customers and therefore your inventory comes under accounts receivable.
Prepaid expenses
Any expenses that you have paid in advance are an asset to your business and therefore are accounts receivable. They are considered assets for their future economic benefits. For example, paying your office’s one-year lease in full can be considered as accounts receivable.
Investments
Investments such as stocks and bonds are considered as accounts receivable as they are assets keeping in mind the future of the business. Some investments are considered long-term and contribute to the future growth of the company.
Notes receivable
A loan to a third party that will be paid back within 12 months is considered as accounts receivable. It is worth noting that in these cases, there are proper contracts and rules that must be followed to safeguard your interests as a lender.
Things to keep in mind when choosing the right accounts receivable software
Here are some obstacles faced by businesses that still use traditional methods of accounts receivables management and how that can assist them in choosing the right accounts receivable software for their business:
Cash flow is vital for any business, but companies using outdated accounts receivable processes often struggle to manage it.
Reconciling remittances with payments can waste hundreds of hours for your accounts receivable team each year.
Instead, choose an AR software that digitizes and automates remittance reconciliation with the appropriate invoices in one single transaction.
When the time for payment arrives, you definitely do not want your customers to be limited by the unavailability of their preferred currency being supported by your outdated and rudimentary accounts receivable systems.
That’s why it is wise to invest in an efficient AR management platforms that can hold your accounts receivable in multiple currencies, helping you grow your business while maintaining a positive cashflow, all at the same time.
While discounts are a great way to promote your business and increase sales, they can also inconvenience your finance staff if there is miscommunication.
To circumvent the confusion, it is best to choose an accounts receivable management software that shows complete transparency and real-time visibility of each transaction so as to dispel any clouds of confusion between the finance and sales departments.
With the advent of digitized payments by AR software, paperless invoicing and payment is the most convenient tool for business owners today.
Without automation, sending invoices and payments was the biggest time-consuming component for the AR team. In recent times, however, choosing the correct accounts receivable software can ease the entire process altogether.
Companies that do not have strong collection policies suffer a lot when it comes to receiving payments from customers on time.
Investing in an accounts receivable management system that automates overdue payment notifications and includes customizable policies, such as late fees, can help businesses avoid bad or doubtful debts.
Having credit sales is important to maintain the positive cashflow in your business, but it is equally important to ensure the creditworthiness of the customer you are giving credit to.
You need an AR software that automates real-time trend analysis, payment pattern, and overall behavior towards payment so that you can safeguard your business against possible bad debts.
Choosing good accounts receivables management software is not an easy task. That’s why consider all the above points before going for a particular platform. Always look for software that can eliminate time-consuming tasks with easy-to-use automated features as core needs in an AR management system.
Automate your accounts receivable process
Related pages
Find out the difference between accounts payable and accounts receivable and how automation helps your businesses.
Businesses can manage and pay their vendors on time without missing a due date with the accounts payable software.
Faster payments, employee retention, and improved cash flow, are some of the benefits of automating your accounts receivable.
FAQs
Yes, any invoice can be updated and edited once created. However note that once the invoice is approved by the approver, no further changes can be made.
Yes, Accounts Receivable are an important part of your financial statement as they help in building the asset side of the balance sheet.
No, bad-debt expense is not an accounts receivable as it is not an asset, but a contra-asset i.e. an asset with a credit balance.
Cash collected from customers which isn’t recorded as revenue goes into the Deferred Revenue balance on the Balance Sheet under Liabilities. Once the services are performed, the Deferred Revenue balance becomes real revenue on the Income Statement.
Back-end collections refer to commissions on sales or commissions on providing services. Front-end collections refer to direct sales and services provided.
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