Key to maintaining a company's financial stability and operational efficiency, accounts receivable (AR) is an essential component of every business. Balancing the task of providing goods or services while ensuring prompt payment can be challenging. 

In this article, we’ll define AR, outline the AR process, and discuss some advantages an effective AR system can provide. We’ll also discuss some common AR pain points and offer insights on how to solve them. 

Accounts receivable is a financial term that refers to the money owed to a business by its customers who have purchased goods or services on credit. These outstanding invoices represent a claim for payment that the business expects to receive within a specified time frame, typically 30, 60, or 90 days. 

An essential component of a company's revenue stream and working capital management, effectively managing accounts receivable is essential for maintaining a healthy cash flow and ensuring the business has the necessary funds to cover its operational expenses and invest in growth. Proper management of accounts receivable includes issuing invoices promptly, setting credit policies, and actively monitoring outstanding balances to reduce the likelihood of bad debts and improve the collection process.

On a balance sheet, accounts receivable and other current assets, such as cash or inventory, are listed in the 'Current Assets' section. This section provides a snapshot of the company's short-term financial resources available to cover its short-term liabilities or operating expenses.

Read our article What are accounts receivable for more information.

The accounts receivable process, often referred to as the order to cash (O2C) process, involves a series of steps taken by finance teams to manage the collection of payments from customers who have purchased products or services on credit. 

The AR process includes the following steps:

1. Create accurate invoices: Preparing and issuing invoices promptly after providing goods or services. Invoices should include the payment terms, due dates, and applicable early payment discounts and/or late payment fees.
2. Send invoices to customers: Distributing invoices to customers via email, mail, or via online invoicing or accounting platforms.
3. Monitor outstanding balances: Tracking and reviewing customer accounts and outstanding invoices. Keeping track of payment deadlines and payment status.
4. Handle customer communication: Engaging with customers to address payment queries or disputes and issuing payment reminders if necessary.
5. Receive and record payments: Recording payments in the accounting system as they come in and allocating payments to the appropriate customer account.
6. Reconcile accounts receivable: Regularly reconciling accounts receivable records with bank statements and financial reports to ensure accuracy.
7. Manage late or non-payments: Following up with clients for overdue payments and potentially escalating to collections or initiating legal action if required.
8. Evaluate credit policies: Periodically reviewing and adjusting credit policies, payment terms, and collection strategies to optimise cash flow and minimise bad debts.

An effective accounts receivable process directly contributes to the financial health of a business. With a well-organised, accurate, and efficient system, companies can reap numerous benefits that ultimately contribute to overall growth and success.

First and foremost, improved cash flow is a major benefit of an effective accounts receivable process. By promptly issuing invoices, tracking payments, and diligently following up on overdue accounts, businesses can ensure that they receive the money they are owed in a timely manner. This enables better cash management, which is essential for covering operational expenses and investing in opportunities for business growth.

Next, an efficient accounts receivable process can lead to stronger customer relationships. By clearly communicating payment terms and expectations, organisations present themselves as professional and trustworthy business partners. Moreover, maintaining accurate records and addressing customer inquiries in a timely manner helps to foster trust and goodwill, contributing to customer retention and loyalty.

Another benefit of an effective accounts receivable process is the reduction of bad debt and write-offs. By carefully monitoring outstanding balances and employing proactive collection strategies, businesses can mitigate the risk of delinquent accounts, thereby reducing the financial impact of non-payment on their bottom line.

Lastly, an optimised accounts receivable process saves both time and resources. Automation software, streamlined workflows, and effective communication strategies all contribute to reducing the manual work and labor costs associated with AR tasks. This allows businesses to reallocate resources to other business operations.

An effective accounts receivable process is instrumental in ensuring a company's financial stability, nurturing positive customer relationships, and driving overall business growth. By focusing on creating and maintaining an efficient AR system, businesses can unlock their full potential and continue to thrive in a competitive market.

Managing the accounts receivable process can present various challenges, often causing frustration for a business and its customers. 

Some common accounts receivable pain points include:

1. Inaccurate invoicing: Invoicing errors, such as incorrect amounts or billing details, can lead to disputes and delayed payments, negatively impacting cash flow and customer relations.
2. Late or overdue payments: When customers fail to make timely payments, it can result in cash flow issues, higher administrative costs, and increased risk of bad debt.
3. Manual processes: Manual, paper-based approaches to managing accounts receivable are time-consuming, labour-intensive, and error-prone, which can result in inefficiencies and increased costs.
4. Lack of visibility and control: Without a clear and comprehensive view of outstanding invoices, customer credit history, and payment trends, it’s difficult to make informed decisions, manage risks, or effectively plan for future cash flow needs.
5. Inadequate communication: Ineffective communication with customers regarding payment terms, due dates, and follow-ups can contribute to late or missing payments and strained customer relationships.
6. Poor credit management: Extending credit to customers without properly evaluating their creditworthiness can lead to higher risk of non-payment and increased bad debt.
7. Difficulty forecasting cash flow: Without a streamlined accounts receivable process, accurately projecting cash inflows is difficult, and businesses may struggle to make informed decisions about operational expenses, investments, or expansion plans.

Businesses can significantly enhance their accounts receivable management and overall financial performance by addressing these pain points through process improvements and automation solutions.

AR Automation solutions, such as Quadient AR, enable you to streamline your accounts receivable workflow and solve the AR pains we’ve covered here (and more).

With Quadient AR, you’ll be able to:

• Reduce your days sales outstanding (DSO)
• Simplify the collections process
• Improve the customer experience with automated collections communications
• Accurately predict cash flow
• Recoup lost revenue
• Reduce the burden on your AR staff
• Effectively mitigate credit risk and drive more reliable sales

As we’ve covered here, the accounts receivable process is a crucial component of any business, but it can present various challenges that lead to cash flow disruptions and strained customer relationships. Understanding the most common accounts receivable pain points is the first step towards finding solutions to overcome these hurdles. By implementing AR automation and leveraging cutting-edge technologies to streamline the process and enhance communication with customers, businesses can mitigate these pain points, resulting in improved cash flow, increased operational efficiency, and, ultimately, fostering positive customer experiences.