Breaking Down the Accounts Receivable Process: A Step-by-Step Guide

A company's income statement is the first stop for top management teams looking to improve profitability. 

Another critical (at times overlooked) area that impacts profitability and the business's overall financial health is Accounts Receivable (AR). Organizations that take time to evaluate unpaid invoices early, stratify due receivables, and set up strong collections policies will experience benefits far beyond the finance department.

But sadly, this is a missed opportunity for most companies…

According to VersaPay’s annual ’State of Digitization in B2B Finance’ report, 77% of the 300 CFOs interviewed revealed that their teams are not up to date on their accounts receivable.

We’re taking it from the top, explaining the entire accounts receivable process, identifying the challenges, and discussing ways in which you can optimize the AR process for your business.

What is the accounts receivable process?

The accounts receivable process is a series of steps taken by the finance team to record and collect the money owed to the business by a customer for products purchased or services delivered. 

What really caught our attention is that — owing to invoice processing complications, nearly 2 in 5 CFOs reported that their AR teams are weeks and, in some cases, months behind and will never catch up on invoices.

The President of The Kaplan Group, Dean Kaplan, couldn’t have put it better when he said that “unpaid invoices take a nasty bite out of cash flow”. All this brings to light the need for an efficient accounts receivable process to ensure unpaid invoices don’t end up crippling cash flow and stunting business growth.

TL;DR

• The accounts receivable process includes eight steps — starting when a customer places an order, followed by assessing the customer’s credibility, generating an invoice, following up on payments, addressing invoice disputes, writing off bad debts, accepting payments, and finally reconciling them.
• There are a few challenges that businesses have to deal with in the accounts receivable process. This includes inefficiencies in invoicing, difficulties in tracking and reconciling payments, and poor communications and follow-up processes.
• Automating the accounts receivable process can not only speed up the invoice processing time but also enable businesses to get better visibility of outstanding invoices, enhance reporting capabilities, and scale up billing and collection processes with ease. 

The 8-step accounts receivable process

Converting accounts receivable into cash is critical to keeping your income statement intact. We’re breaking down the 8-step accounts receivable process that will help you manage invoicing and collections better and transform your order-to-cash process.

The AR process gets initiated when the customer places an order, goes on to include multiple steps such as assessing the creditworthiness of the customer, generating an invoice, and sending payment reminders — and ends only once the outstanding payment has been collected. 

Let’s delve deeper into the 8-step accounts receivable process:

Step 1: The customer places an order

Once the customer has placed an order, the business will need to approve the Purchase Order (PO). This kickstarts the accounts receivable process. After the PO is approved, a sales order is created by the business, which is a binding order with the customer and includes the details of the sale like the quantity, price, and other relevant terms. 

Step 2: Assessing the creditworthiness of the customer

For businesses that undertake large orders involving high-value transactions, it’s important to assess if the customer is capable of paying up on time. To ensure this, businesses assess the customers’ credibility and check past payment histories before issuing an invoice. Businesses can choose to skip this step for recurring payments where the customer has already proven their credibility in the past.

Step 3: Generating an invoice

Once the customer’s credibility is determined, businesses can proceed to raise an invoice. The invoice will include details of the purchase and the payment terms. Any late fees that are chargeable or discounts offered should also be included in the invoice.

50% of CFOs at companies with revenues of $250 million or more state their AR teams process over 2,500 invoices a month. As such, businesses today need billing systems with scalable and flexible features that allow them to automate invoice generation and configure complex pricing models and contracts.

Step 4: Sending timely payment reminders

In an ideal world, your customers would pay every invoice — in full — and on time. But the reality is that unpaid invoices have become an inevitable pet peeve for businesses. 

Managing collections is in itself an uphill task. What many businesses fail to assess is the costs, time, and effort associated with managing bad debts. 

It’s important to take into account the time and resources spent on analyzing past-due balances, following up on unpaid invoices, negotiating, and keeping track of non-paying customers. Businesses need automated payment reminders and dunning sequences to speed up payments and improve cash flow.

Step 5: Addressing and settling disputes, if any

Report findings reveal that AR teams end up spending way too much time (more than half of their workdays) dealing with invoice disputes. In most cases, customers end up paying late due to invoice disputes. AR teams need to promptly address and initiate the invoice dispute resolution process early to ensure strong customer relationships and prevent any further delays.

At times, customers may choose to pay a portion of their invoice that’s not in dispute. This is called a short payment. It makes the entire process more complicated for AR teams when it comes to applying short payments to the accounting systems and reconciling them.

Step 6: Writing off uncollectible debts

The business’s chances of collecting outstanding invoices slim down as the days pass by. What happens when all attempts to collect payments end up being ignored by the customer? This debt will be written off as a bad debt.

Step 7: Accepting and processing payments

It’s imperative for you to make it easy for your customers to pay you. Offering multiple commonly accepted payment options like cards, ACH, wire transfers, and digital payments like Venmo and PayPal is important. To accept payments online, businesses will need a payment gateway, a payment processor, and, in most cases, a merchant account.

Step 8: Managing reporting and analytics

The AR team will need to stay on top of many critical metrics like Days Sales Outstanding (DSO), Monthly Recurring Revenue (MRR), and AR Turnover Ratio. When it’s time to close the books, AR teams will need to record all transactions and keep the AR accounts on the general ledger up-to-date. 

The 3 most common challenges hampering the accounts receivable process

As we’ve seen so far, the AR process involves a series of complicated steps that introduce challenges in invoicing, reconciling payments, and lapses in communications.

With finance teams facing difficulties across multiple fronts in today’s volatile economic climate, sticking to manual AR processes and legacy collection methods ends up increasing financial risks, straining customer relationships, and eroding the organization’s resilience to tide over economic uncertainties.

Here are a few challenges that could crop up in the accounts receivable process:

1. Inefficient invoicing processes

Inaccurate or delayed invoicing can lead to late payments. While most legacy billing tools automate invoice generation, they are not flexible enough to create elaborate contracts, nuanced pricing models, or manage diverse usage data and trends.

2. Tracking and reconciling payments across multiple, siloed systems

Many AR teams are still ‘making do’ with a patchwork of systems involving spreadsheets and legacy billing tools. The result? A lot of information gets lost in transmission, resulting in incorrect payment records or, worse, missed payments.

With too many disparate and fragmented systems, AR teams often find it hard to reconcile payments and keep the financial statements updated. While manual processes are prone to human error, they also create multiple sources of data, resulting in AR teams taking weeks to record cash inflows and reconcile accounts.

3. Lapses in communications (both internally and with clients)

In many cases, late payments can be traced back to poor communication or a lack thereof. AR teams that manually handle collections and payment reminders find it extremely challenging to send out timely payment reminders. Moreover, communications carried out with customers across multiple channels, like over calls and email, make collections a lot more difficult to track. They also have no centralized system to track unpaid invoices and determine which customers need to be reminded about upcoming payments and at what time.

Automating your accounts receivable process 

There’s no escaping unpaid invoices. Having said that, there are ways in which you can make the invoicing and collection process more efficient and cost-effective.

The short answer? Automation. We will get into the details of how businesses can leverage automated billing tools to enhance the collection process, maintain a healthy cash flow, and foster long-standing relationships with customers. 

With advanced billing automation tools, AR teams can benefit from:

• Timely invoice generation: AR teams that previously spent hours of manual effort on generating invoices can now invoice clients on autopilot. Some of the modern billing tools allow businesses to set up recurring schedules to generate invoices automatically, cutting down on the time spent on repetitive efforts as well as reducing invoicing errors that are prone to occur given the complex nature of today’s pricing models.

• Increased visibility of overdue payments and bad debts: Leveraging automated tools also enables businesses to gain greater visibility over their cash flow, identify late-paying customers or bad debts, and manage payments from a centralized dashboard.

• Effortless payment reminders: Following up with customers on pending payments should not be hard. Automated billing tools on the market today come loaded with functionalities like email templates and automated dunning sequences that let you send out payment follow-ups and reminders about reaching a certain threshold, overages, or failed payment alerts.

• Enhanced reporting capabilities: Modern billing tools with automation capabilities help AR teams track payment statuses on the go. They come with integrated dashboard capabilities and advanced reporting features that provide real-time updates on the critical metrics top management teams rely on.

• Scalable billing and collection systems: For businesses looking to scale up their operations and manage collections in bulk, automated tools reduce the administrative burden on AR teams, allowing them to scale up with ease and in a cost-effective manner. These tools also enable you to stratify your receivables and maximize ROI by prioritizing high-value accounts. This way, your AR teams can focus more on strategic aspects and on invoices that make up the bulk of your outstanding receivables.

Optimize your AR processes with Zenskar

Globally, top-performing organizations are spending less time on the AR process cycle and relying on modern billing tools like Zenskar to prioritize high-dollar accounts and collect payments in days instead of weeks.

In addition to automating the end-to-end billing and invoicing processes, there are a few advanced AR functionalities that set Zenskar apart from the rest of the tools out there.

With Zenskar, you can:

• Scale your debt communications with branded email templates
• Segment customers based on key attributes like customer aging status, geography, and payment status
• Leverage customized dunning sequences to prioritize high-risk accounts
• Add payment links directly to the invoice 
• Track and map refunds and reversals by invoices and customers
• Measure usage data and set up usage alerts for your customers
• Access reports in real time and stay compliant with evolving regulations 

The best part? You can do all this without relying on engineering bandwidth.

Experience efficient and faster payment collections

As central banks lift rates and raising funding from external sources becomes a painstakingly difficult task by the day, CFOs are prioritizing enhancing the accounts receivable process more than before.

Zenskar’s advanced debt management capabilities work much like an email management software within your billing system. Businesses now have the option to use customizable branded templates and send out timely payment reminders. Apart from personalizing debt communications and sending them at scale, businesses can also configure preferred payment methods and manage all things payment (payment status, partial payments, reversals) from a single dashboard.

Reimagine your AR process cycle with Zenskar. Book a demo today!

Frequently Asked Questions (FAQs)

1. What are the steps in the AR process?

The steps in the AR process include the customer raising an order, assessing the customer’s creditworthiness, generating an invoice, sending payment reminders, settling invoice disputes, writing off uncollectible debts, processing payments, and managing AR reporting.

2. Why do you need to automate the accounts receivable process?

By automating the accounts receivable process, businesses can benefit from speeding up invoice generation and reducing manual billing errors. They can also improve cash flow with automated reminders, track overdue payments, and access real-time reports and critical metrics. Automated tools also come with advanced billing and collection features that enable businesses to scale up and process a large volume of receivables.

3. What is the difference between accounts receivable and accounts payable?

Accounts receivable is the money that is due to a business for a product purchased or service provided, whereas accounts payable is the amount that a business owes to vendors or suppliers.