7 Unmissable Steps in the Accounts Receivable Process   

The accounts receivable process is a vital component of your business’s financial health. Money inflows, particularly from accounts receivable (AR), represent the payments you’ve yet to receive for goods or services provided on credit.

While these are future cash inflows, they are still considered key [liquid] assets from an accounting perspective and play a critical role in sustaining your business.

In this article, we’ll cover essential steps to help you build a strong and effective AR accounting process.

Why Building a Solid Accounts Receivable Process is Important 

For most businesses, the credit period ranges from a few days to a few months. Some companies even offer credit term extending up to a year. Customers who’ve purchased goods on credit are responsible for settling their invoices within the agreed timeframe, notably. 

However, you also need to track your receivables, no matter if the credit period is a few days or a year, or how good your customer relationships are. 

You can’t just issue invoices and wait for the pending payments to eventually land in your account, can you? What if your customer: 

• Forgets the invoice deadline 

• Makes a payment error 

• Runs into financial difficulty 

• Has a lengthy approval process 

• Has an inefficient accounts department 

But there are two sides to the coin!

The issue could be on your end, too. Invoicing errors (like incorrect pricing or missing information) and unclear payment terms (such as due dates or payment methods), for example.  

Please note that corrections take time, and lack of clarity causes confusion. This not only prolongs the collection process unnecessarily but also increases overhead costs. 

7 Steps to Achieving Your Accounts Receivable Process Goals

This is what an accounts receivable process generally looks like (Key Steps):

1. Set Your Credit Terms  

A well-defined credit policy with clear terms and conditions lays a strong foundation for effective accounts receivable management. Ambiguities around credit limits, discounts, penalties, and payment schedules can disrupt collections and negatively impact customer relationships.

2. Receive Oder/Customer Activation 

Accepting a customer’s order on credit initiates your accounts receivable cycle, committing your company to deliver goods or services with the expectation of payment on a mutually agreed future date.

3. Create Accounts Receivable Invoice   

Generate the invoice according to the credit terms. Include essential details in the invoice, such as the date of issue, customer information, item/service details, billing amount plus taxes, and due date. Timely dispatch—whether by email or paper—is equally important.

This ensures the customer has ample time to respond and make timely payment to you.  

A successful AR cycle means timely collections with minimal hassle and reasonable operational costs. However, the process itself is neither simple nor quick. A properly managed and well-executed AR process spans several stages or steps.  

4. Payment Collection and Receipt   

A seamless and error-free transfer of funds from the customer’s account to the company’s account is the most crucial milestone of the AR cycle. Excessive delays or bounced payments can negatively impact your credit sales account.

5. Payment Record and Update    

Accountants responsible for accounts receivable should ensure that customer payments are recorded on the day they are received. This allows for accurate and expedited month-end reconciliations and ensures an up-to-date general ledger.  

 6. AR Reconciliations  

Assigning a unique invoice reference number helps ensure error-free processing and constant tracking of payments to be collected. Upon receipt, you need to reconcile the payment with your customer’s account balances.  

7. AR Reporting    

Update payment records, both received and pending, to assess the effectiveness of your accounts receivable process and policy. Accounts receivable summaries and aging reports provide valuable insights to improve your invoicing, collection processes, and credit policy.

From Expected to Actual Payment: Some Tips to Improve Receivables Turnover

Markedly, accounts receivable bring real value only when actual collections materialize. So, consider the following measures to elevate your AR process:  

• Create collection maps to segment customers based on their payment history 
• Establish personalized processes for each credit sales account 

• Implement regular tracking and scheduled follow-ups 

• Hire an expert Accounts Receivable outsourcing service if needed 

Need help streamlining your accounts receivable process cost-effectively? Outsource to our accounting experts and enjoy hassle-free collections. Contact Us Now to book a free consultation!

• Outsource end-to-end or partially. And save yourself considerable costs and the hassle of running an in-house AR process 

Importantly, it truly helps to conduct a creditworthiness check on your customers, as your business cannot afford to extend credit sales to just anyone! However, you always have the option to customize your credit terms for specific customers or special scenarios.