Accounts Receivable Process Steps: Ultimate Guide

In an ideal world, your business delivers its goods and services and gets paid according to the agreed-upon terms. However, it doesn’t always go that way. In many instances, you’re stuck chasing down unpaid or overdue invoices as part of your accounts receivable process and its many accounts receivable process steps.

Leveraging accounts receivable process automation can free your team members of many headaches and help protect your business’ cash flow. Here, we’ll answer “what is accounts receivable?”, break down the accounts receivable process steps, and see how to automate the accounts receivable process.

What is Accounts Receivable?

Accounts receivable, or AR for short, refers to the money that your business is owed. It also encompasses the process of collecting such funds, meaning that any action taken from issuing an invoice until receiving payment is considered accounts receivable. 

Other terms for accounts receivable is invoicing or bills receivable. 

What Is the Accounts Receivable Process?

The accounts receivable process follows the same steps for every business (however, businesses differ in how they manage their accounts receivable process). The process includes: 

1. Sending invoices after the good or service has been provided (or before, if there is an upfront payment agreement) 
2. Tracking payments 
3. Following up on invoices that are outstanding 
4. Matching invoices to payments received, which is part of reconciliation 

The traditional method for accounts receivable was once done manually, by hand. Companies could track what they are owed on spreadsheets and design invoices to send out and follow up on. 

However, this is cumbersome, messy, and prone to mistakes or missing payments. Instead, with finance automation software, the invoicing process is seamless. Every part of the process, including the tedious reconciliation, can be automated to save time, reduce mistakes, and ensure timely payment. 

What are the Accounts Receivable Process Steps?

Let’s break down the accounts receivable process steps in more detail. We can also see where automation can be of such great value by doing so. 

1. Order Placement

The accounts receivable process begins as soon as a customer makes a purchase. The purchase order marks the start of the sale, in which the company has to fulfill the agreement by delivering the goods or service. At this point, it’s necessary to determine the buyer’s creditworthiness, or likelihood of being able to pay the agreed upon amount. 

2. Credit Approval 

When transactions consist of large amounts, the ability to evaluate creditworthiness is even more important. It’s up to your business to approve or deny the customer’s purchase. 

3. Invoicing

An invoice contains all the details of the goods delivered or services rendered, along with the quantity and price. It contains the total amount owed, as well as the due date. You don’t want to be late on invoicing because that will delay your ability to receive the payment. This is a great and easy step to automate with invoicing software (which will also send reminders for overdue accounts). 

4. Collections

Should a late payment thwart your business’ ability to collect what it is owed, it must move into collections management. It’s now time to follow up on payment, and the frequency and severity at which you do so may depend on the customer’s history and even the amount that’s owed. 

5. Write Offs 

Sometimes, payments never make their way to your business, even though they are rightfully owed. While it is unfortunate, it also adds another step to your process, namely writing off the missing payment as bad debt. 

6. Payment Processing

Alternatively and ideally, if payments are being made, you’ll have to process them however you determine is fitting for your business. Payment processing can happen via ACH/EFT, wire transfer, credit or debit cards, cash or checks. 

7. Reporting and Analytics

At the end of the month, during the month-end close process, finance teams will check that the payments recorded match up with closing balance in the general ledger. With reporting and analytics, your team can assess the success of its AR process or make adjustments as needed to improve collections effectiveness. 

With finance automation software, the reconciliation process is expedited in minutes, rather than taking days. Reports can be automatically generated, and analytics exist at your fingertips as the software will collect, connect, and transform your business’ financial data into valuable insights. 

How to Track Accounts Receivables Performance?

How will you know if your accounts receivable process is working well or needs work? Tracking specific key performance indicators (KPIs) can provide the answers you need. 

Here are some key metrics to track: 

• Days Sales Outstanding: How long does it take your company to collect payment after making the sale? 

• Staff Productivity: Measures your employees’ productivity by assessing the amount of output (completed work) based on the amount of input (time, resources, effort). 

• Collective Effectiveness Index: What is your business’ ability to collect on payments owed? To calculate, compare the amount collected in a specific period over the amount of outstanding receivables in that same period. 

What are Common Accounts Receivable Challenges?

When dealing with the accounts receivable process steps manually, you’re likely to run into several challenges, including:

• Invoice Creation: The first step of creating an invoice by hand can be plagued with manual data entry errors. Additionally, you can create the invoice, but forget to send it, which will cause delays in payment. 

• Payment Processing: Processing payments by hand also runs the risk of errors, along with compliance risks. 

• Scalability: As transaction volume grows, it becomes harder and harder to keep up with the AR process by hand. It’s possible, but it will require the addition of more staff and/or more manpower hours, which ends up costing more money. 

• Compliance Risks: Handling sensitive customer data requires top-notch security and privacy measures. If you’re sharing data via spreadsheets, emails, and across computer desktops, then you’re facing higher compliance risks. 

• Record Keeping: Recordkeeping takes a lot of time and effort, all of which is prone to errors when being done manually. 

Accounts receivable challenges are easily overcome with the aid of technology. Finance automation software streamlines your most critical workflows. By saving time and removing repetitive tasks from the to-do lists of your finance and accounting team, they can spend more energy on value-add tasks that require human thought. 

What is the Ageing of Accounts Receivable?

The ageing of accounts receivable helps to determine what the next step is to collect on the money you are owed. Here’s what it means. 

• You set initial payment terms, say 30-120 days (typically)
• Once the due date has passed, the accounts receivable have an age. For example, if it’s been 5 days since the due date, the account is aged 5 days

By using this method, teams can determine if the account must be sent reminders or to collections. An ageing report can highlight these details, making it easier for accounting teams to understand what to do next. 

What is the Purpose of an Ageing Report?

By running an ageing report, you know:

• How much every customer owes 
• How overdue each customer’s invoice is 
• Who owes the most 

With this information available, it’s easy to prioritize who to reach out to first and what to focus on. You’ll have insights to manage bad debts better and handle the collection process accordingly. Plus, you can see if a customer owes you money and then decide whether or not to keep rendering services or providing goods if they have yet to pay up. 

What is Traditional vs Modern Accounts Receivable?

Accounting functions have come a long way with the help of software and automation. We can compare the traditional and modern accounts receivable process to showcase how much value automation brings to this primary accounting process. 

Invoicing

• Traditional: Manual generation of invoices with data entry 
• Modern: Automated invoicing, which means that invoices are sent on time, every time with total accuracy 

Collections

• Traditional: Have to follow up via email or calls to check in on status
• Modern: Past-due invoices get sent reminders without having to take any action 

Payment Processing

• Traditional: Manual data entry, which is prone to mistakes 
• Modern: Automated payment gateways with total compliance and built-in security 

Record Keeping

• Traditional: Physical files or digital records (kept in different places, i.e. desktops, flash drives, emails) 
• Modern: Cloud-based and accessible, totally secure and traceable 

Scalability 

• Traditional: Hard and costly to scale - requires hiring more people or adding extra hours of work 
• Modern: Easy to scale, without adding effort 

How Automation Streamlines Accounts Receivable?

By automating the accounts receivable process, your business gets to experience an array of benefits, such as:

1. Quicker Invoicing

The automated generation of invoices means that it’s instant. You can send out all of your invoices in much less time, decreasing any delays, which helps you to get paid in a timely manner. 

2. Streamlined Collections 

Having to manually follow up with different clients becomes time-consuming and frustrating, for all parties included. With automation, a collections management workflow is set up such that reminders make their way to the customer without your team having to remember or follow up. 

3. Real-Time Cash Flow Management 

Real-time payment processing aids in better cash flow management, which can help you make smarter business decisions. 

4. Reduced Mistakes 

Automated record keeping equals accuracy. You no longer have to worry about making manual mistakes when entering transactional data, which also makes your reconciliation process a lot smoother during the month-end close process. 

How to Optimize the Account Receivable Process?

While the accounts receivable process steps are straightforward, it does involve a fair share of oversight and care. If you’re looking to improve upon your process, give these recommendations a try: 

• Set clear credit terms, including due dates, interest on overdue payments and even the option for discounts for early payments 

• Provide multiple payment options to make it easier on customers 

• Have a thorough credit check process before extending credit to customers to reduce the chance of being stuck writing off bad debts 

• Utilize automation software to streamline the entire accounts receivable process to complete processes 100x faster with 98% fewer errors 

• Leverage analytics to review and adjust your accounts receivable process on a continuous basis 

Wrap Up

When the due dates for your invoices arrive, you want to ensure the money is in the bank. The accounts receivable process steps have a lot to gain by implementing finance automation software that can streamline every step, saving you time and money while reducing errors.

By doing so, you know what to expect from your cash flow, putting your business in a prime position to grow while also being able to provide greater insights to the business.