Accounts receivable is a business term used mainly in B2B or “Business to Business” industries. It refers to the money that is owed by your customers for services you’ve performed, or products you’ve delivered. Accounts receivables are the lifeblood of your business, providing you with the cash flow and working capital to run your operation. That’s why creating a standardized accounts receivable process is an important step to creating and running a small business.
Why is it Important to Establish an Accounts Receivable Process?
Establishing a standardized series of steps and actions to be taken during your customer billing cycle will help lead to growth and success. By following a uniform procedure, you’ll be able to better remove emotion and relationships from the process of getting paid by your customers. You’ll also be better organized, which can help prevent oversights which may lead to losses or non-payment.
A major indirect benefit of your new billing procedure policy is a significant productivity boost which can lead to additional cost savings.
What is an Accounts Receivable Process?
The process managing accounts receivables is a series of actions that begins when a client decides to do business with you, and ends when they (hopefully!) pay for the goods or services delivered. The process can usually be broken down into different steps or stages.
The first, and most important step of the accounts receivable process involves extending credit to your customer. This step is vital because it can mean lead to massive losses if overlooked. You’ll need to prepare a credit application for your client to complete and return to you prior to doing business. You’ll also want to include terms and conditions of the sale to ensure that your customer understands their obligations.
A business credit application will most often include:
- Complete business mailing address and contact information
- Entity type, date of formation, and company officer information
- Banking information, account numbers, and contact person
- 3 current trade references and their contact information
A terms and conditions document will most often include:
- Payment terms/when payments are due
- Late fees, charges, or interest rates
- An acknowledgement to certify your customer’s understanding of all terms and other obligations
The Invoicing Stage
The next stage of the accounts receivable process involves invoicing or billing your customer. This generally occurs after a service is performed, or goods are delivered. You should generate an invoice with your accounting or billing software that includes:
Your customer’s information
Even if you are sending your invoices electronically, you should include your customer’s mailing address. You should also include any relevant contact person, phone numbers, email addresses, or “ATTN TO”. This will ensure that the receivable makes it to the right person or department in a timely matter.
Including an invoice date is important, because it establishes a date for the payment grace period to begin, and can provide your customer with a general reference as to when a purchase was made.
Payment due date
The payment due date is extremely important because it establishes a firm date or time that a particular invoice must be paid by. This should coincide with the agreed upon payment terms referenced in the prior completed credit application.
Description of goods or services sold
Providing a brief description of what exactly your customer is being billed for is an important piece of information to include on your invoices. This will let them know exactly what they are being billed for, and can help avoid and delays in payment. You should include an item or service name, and quantity (units, hours, pieces).
An invoice won’t do much good if your customer doesn’t know how much to pay! Including the amount due is extremely important. Be sure to place it in a conspicuous place on the actual document. Also be sure to separate or otherwise make the “total amount due” precisely clear if there are multiple prices listed, such as per-unit prices or hourly rates.
This step of the accounts receivable billing process can either go one of two ways, with one of them obviously been more desirable. What determines which you go is based on your customer’s payment, or non-payment.
If your customer pays the receivable:
If you receive payment in full and on time, great! You are now ready to record this payment. You or your AR officer should identify the specific payment in the business bank account, and allocate/reconcile it to the particular invoice that it applies to. This ensures that the correct amount was received and accounted for.
If your client doesn’t pay by the due date, which does unfortunately happen from time to time, you should immediately initiate your collections procedures to help save your business from enduring a loss. Having a firm collections system included in your accounts receivable process can be one of the most difficult parts of running your business.
While maintaining strong relationships with your customers is a vital aspect of business, it should not interfere with finances and getting paid. After all, the reason you are in business is to make money, not make new friends. It can be difficult to remove emotion from the process, but it becomes easier by following this guide to standardize an accounts receivable process.
Following these steps will help increase the results of your collections efforts. They can be tailored to your specific business or industry. Being consistent in your efforts is what’s most important here.
Re-invoice the customer
If payment is not received on or before the invoice due date, you should immediately re-invoice the customer. Sending the invoice via electronic means is the fastest and most desirable way, but you should also send another copy via traditional mail. Be sure to make applicable late fees or finance charges conspicuous.
Sending a short follow up email is also a good idea. It may have just been an oversight, or there could have been an issue with the bank or mail that caused the payment delay. A brief, friendly message that states the invoice number, amount, and due date is enough here. Simply state that you have not received payment, and ask if they can look into it for you.
Managing potential disputes
This may not apply to all scenarios, but it does come up. A reason for not getting paid may be due to a dispute with your customer over invoice charges. You should maintain and produce relevant documents and other information to validate the amount you are invoicing your client in the case of a legal case arising.
Follow up call/letter
If you still haven’t received payment 15 days after the due date, you should immediately send a letter stating that the receivable will be turned over to collections if payment is not received within the next 15 days (30 days after due date). Next, you should follow up with a phone call to your customer’s accounting department or personnel. A friendly reminder of their payment obligations is all that’s needed.
Turning it over to collections
If you still haven’t received payment 30 days later, the account should be turned over to a reputable collections agency. While it may be difficult, remember that your customer is the one that began to strain your relationship through their nonpayment. You should also remember that you’ve already lost money, so don’t dwell on the loss of a customer and revenue stream.
How to Use These Steps to Implement Your Own Accounts Receivable Policy
The steps listed above are general in nature, but apply to most scenarios and business types. For example, your business may have extended payment terms such as NET-60. Or maybe you are not willing to be as flexible, so you will turn an invoice over to collections if payment isn’t received just 15 days after the due date.
What’s important is to be consistent when applying your accounts receivable policy. In other words, once you create it, you must stick to it.
Do you have a horror story that could have been prevented by having an accounts receivable process in place? Share it in the comments below!