Accounts receivable (AR) processes are at the heart of a company's cash flow management. While the concept of AR might appear straightforward, the process is often riddled with complications. AR teams frequently contend with late payments, unresolved disputes, and unpredictable payment patterns, making the collection process anything but straightforward.
In this guide, we will break down the full cycle of AR, highlighting the most common inefficiencies that prevent timely payments and explaining how you can optimize your AR workflows.
Accounts Receivable Process: An Overview
The AR process encompasses all activities from the moment a sale is made until the payment is received and recorded. On the highest level, it involves the following key tasks:
- Sending out invoices
- Managing collections
- Processing payments
- Matching payments to invoices and posting to accounting system
All these tasks can be intricate, especially with manual workflows. Let’s break down the process further.
Steps in the Accounts Receivable Process
1. Purchase Order
When a customer decides to make a purchase, the AR process begins. Here's what happens:
- The customer sends a purchase order (PO)
- You review and approve the PO
- You create a sales order (SO) which includes:
- Goods/services being sold
- Quantity and price
- Delivery date and location
- Terms and conditions of the sale
- Your credit department reviews and approves the SO before sending it to the customer
2. Credit Approval
For B2B transactions, selling on account (extending credit) is quiet common. This step involves:
- Assessing the customer's creditworthiness through a credit application process
- Using your company's documented credit policy to evaluate credit risk
- Considering factors like your business size, margins, and current cash flow
- Potentially arranging alternative payment terms (e.g., cash on delivery) for high-risk customers
3. Invoice Creation and Delivery
The invoice is the official record of the customer's purchase. Key aspects include:
- Detailing the amount owed and the payment due date
- Clearly stating payment terms (typically 30, 60, or 90 days)
- Specifying any late payment fees
- Creating invoices using your ERP system or other tools
- Delivering invoices promptly via email, EDI, or mail to start the payment clock
4. Collections Management
Inevitably, some customers will pay late. An effective collections process involves:
- Following up with customers at regular intervals:
- <7 days past due: First friendly reminder
- 8-14 days past due: Second contact
- 15-30 days past due: Third contact, possible dunning letter
- 31-45 days past due: Fourth contact, final notice
- 46-60 days past due: Continued outreach every 5 business days
- 61-90 days past due: Consider involving senior management, legal counsel, or a collection agency
- Investigating reasons for late payments before starting collections
- Reviewing the customer's payment history to determine the appropriate approach
If you need some proven templates to draft professional collections emails, check out this article.
5. Dispute Resolution
Invoice disputes can significantly delay payments. Handle them by:
- Identifying common causes of disputes (e.g., human errors, discrepancies between proposals and invoices)
- Addressing short payments (partial payments of undisputed amounts)
- Initiating the dispute investigation process as soon as an invoice becomes overdue
- Working closely with customers to resolve issues and preserve relationships
6. Bad Debt Management
When all collection efforts have been exhausted:
- Determine when to classify a debt as uncollectible based on your industry standards
- Write off uncollectible receivables as bad debt
- Use an allowance for doubtful accounts to plan for potential losses
7. Payment Processing
Be prepared to handle various payment methods:
- ACH or EFT
- Wire transfers
- Debit, credit, or virtual cards
- Checks (still widely used in B2B transactions)
- Consider using payment processors, gateways, and merchant accounts for online payments
- Manage lockboxes for check payments, if applicable
8. Payment Posting
After receiving payment, the cash application process begins:
- Record the payment in your AR ledger as a credit
- Match payment information to the correct invoice(s)
- Record any relevant credits or discounts
- Close out the receivable in your ERP system
- Handle complications like missing remittance advice or mismatched information
9. Reporting and Analysis
Regularly assess the health of your AR:
- Conduct monthly (or more frequent) reviews of AR status
- Update AR aging reports at least monthly
- Track key performance indicators (KPIs) such as:
- Days Sales Outstanding (DSO)
- Staff productivity
- Collections Effectiveness Index (CEI)
- Customize your KPIs based on your business's unique challenges and priorities
By following this detailed process, businesses can effectively manage their accounts receivable, improve cash flow, and maintain strong customer relationships. The key to success lies in consistency, clear communication, and leveraging technology to streamline these processes wherever possible.
Common Challenges in the Accounts Receivable Process
While the accounts receivable process may seem straightforward on paper, many businesses face significant hurdles in practice. As companies scale and invoice volumes increase, these challenges can severely impact cash flow and operational efficiency. Let's explore the five most common pain points in traditional AR workflows:
Manual Invoice Creation and Delivery
Many companies still rely on outdated methods for invoice distribution, such as snail mail or manually emailed PDFs. The monthly ritual of invoice distribution still involves printing reams of paper, stuffing envelopes, and relying on the postal service. This archaic process not only consumes valuable time and resources but also introduces unnecessary delays. By the time customers receive their invoices, days or even weeks may have passed, leaving them in the dark about their current account status and potentially delaying payments.
But even companies that have taken a step into the digital age aren't immune to inefficiencies. Consider the seemingly more modern approach of emailing PDF invoices to customers. While it eliminates the need for paper and postage, it often remains a surprisingly manual and time-consuming task. AR team members find themselves attaching PDFs to individual emails or navigating the complexities of uploading invoices to various customer portals. This process, while digital on the surface, still demands significant human intervention and is prone to errors and oversights. Moreover, it fails to provide customers with real-time access to their account information, leaving both the business and its clients without a clear, up-to-date picture of outstanding balances and payment statuses. In an era where instant information and seamless processes are the norm in many aspects of business, these invoice distribution methods stand out as a thing of the past, ripe for innovation and automation.
Ad Hoc Collections Outreach
For many businesses, collections is one of the most difficult parts of the accounts receivable process. Without an automated system, collecting payments often means your team spends hours each week sending emails, making phone calls, and hoping for responses. On top of that, think about trying to collaborate while dealing with disputes, mistakes, and miscommunications. It's time-consuming, frustrating, and prone to errors.
The problem gets worse as unpaid invoices stack up. Many AR departments have so many outstanding invoices that they can't keep up. When time is tight, teams often focus only on the largest unpaid bills. This might seem like a good idea, but it means smaller invoices get ignored. Over time, these smaller amounts add up, hurting your cash flow and overall financial health.
This approach to collections isn't just inefficient – it's costing your business real money. Without a system to manage all your receivables, regardless of size, you're likely leaving cash on the table that could be used to grow your business or improve your operations.
Complex Payment Processing
Accepting online payments is far more complicated than it should be. Companies often find themselves juggling multiple, disconnected systems to process different types of payments. This patchwork approach creates a host of problems. Payment processing slows down because these systems don't talk to each other well, forcing your team to manually enter data to bridge the gaps between different technologies. This not only wastes time but also increases the risk of errors.
The challenges don't stop there. Handling sensitive payment information across various platforms raises compliance concerns, putting your business at risk. And despite all these digital options, many companies still find themselves tied to the phone, spending valuable time collecting and processing card information manually. This mix of old and new methods creates a confusing, inefficient process that frustrates both your team and your customers, ultimately slowing down your cash flow and increasing the workload on your AR department.
Slow Cash Application
Companies receive payments through a wide variety of methods, from traditional checks to electronic transfers and credit card payments. While this flexibility is great for customers, it creates a significant challenge for accounts receivable teams. The task of matching these diverse payments to their corresponding invoices is an involved process. Many businesses still rely on manual methods to accomplish this, with AR staff spending hours poring over payment details and invoice records to make the right connections. This labor-intensive approach not only slows down the entire cash application process but also increases the likelihood of errors. When mistakes happen, they can lead to delays in updating customer accounts and financial records, creating a ripple effect of inaccuracies throughout the system.
The problem is further complicated by the lack of standardization in remittance information. Some payments come with detailed remittance advice, while others provide minimal or even no information at all. Dealing with these variations, or worse, missing information, adds another layer of difficulty to an already challenging task. As a result, many businesses find their cash application process to be a constant bottleneck, hindering their ability to maintain accurate financial records and effectively manage their cash flow.
Need for Customer Communication
Despite advances in technology, many accounts receivable processes still require direct interaction with customers, especially when it comes to resolving disputes or clarifying payment issues. These interactions, while necessary, often become a source of frustration and inefficiency for both AR teams and customers. The root of the problem frequently lies in the reliance on email as the primary communication channel. Email threads can quickly become long and convoluted, with important information buried beneath layers of back-and-forth messages. This leads to slow progress in resolving issues, as team members waste time searching for relevant details or waiting for responses that may be overlooked in a busy inbox.
The lack of a centralized communication system also means that there's often limited visibility into the status of disputes or queries for all parties involved. AR team members, their managers, and even the customers themselves may struggle to get a clear picture of where things stand. This problem is compounded when communication needs to happen between AR and AP teams, especially in larger organizations or when dealing with corporate customers. The result is an inefficient process that not only delays resolution but can also strain customer relationships and tie up valuable resources in both AR and AP departments.
These challenges highlight the limitations of traditional, manual AR processes. As businesses grow and transaction volumes increase, these inefficiencies can lead to significant delays in cash collection, increased DSO, and strained customer relationships.
The Power of Software in Accounts Receivable Automation
After exploring the common challenges in the AR process, it's clear that many of these issues stem from manual, time-consuming tasks. The good news? Technology offers a solution. Let's dive into how AR automation can transform your receivables management.
Streamlined Invoice Creation and Delivery
AR automation software can generate invoices automatically based on sales orders or contracts, eliminating manual data entry and reducing errors. These systems distribute invoices electronically via email, customer portals, or EDI, ensuring quick and efficient delivery. Both AR teams and customers benefit from real-time visibility into invoice status, improving transparency and communication. The results are significant: businesses see drastically reduced time spent on invoice creation and distribution, leading to faster payments. Customers enjoy an improved experience with easy access to their account information, fostering better relationships and potentially increasing customer satisfaction and loyalty.
Intelligent Collections Management
Modern AR solutions bring intelligence to the collections process. They offer automated reminders based on customizable rules and customer segments, ensuring consistent follow-up without overwhelming your team. AI-driven prioritization of collection efforts helps focus on the most critical or likely-to-pay cases first. Self-service customer portals allow for easy payment and communication, reducing the burden on your AR team. These features lead to more consistent and timely follow-up on all outstanding invoices, a more efficient use of your AR team's time as they can focus on high-priority cases, and ultimately, improved cash flow with faster collections.
Integrated Payment Processing
Advanced AR platforms streamline payment processing by providing a single, integrated system for accepting multiple payment methods. They offer secure online payment portals for customers, making it easy and safe for them to pay. These systems also automate the reconciliation of payments with invoices, a traditionally time-consuming task. The benefits are clear: faster payment processing leads to improved cash flow, while enhanced security and compliance in payment handling reduce risks. The reduction in manual work for payment entry and reconciliation frees up your team to focus on more strategic tasks.
Automated Cash Application
Intelligent cash application tools leverage AI and machine learning to automatically match payments to invoices, even when dealing with various remittance formats or incomplete information. These systems can update customer accounts and financial records in real-time, ensuring your books are always up-to-date. The results are significant time savings in the cash application process, increased accuracy in payment matching, and up-to-date financial reporting. This not only reduces errors and speeds up processes but also provides better data for decision-making.
Enhanced Customer Communication
Collection automation tools offer centralized platforms for all customer interactions, providing a single source of truth for customer communications. Self-service portals allow customers to access their account information and raise queries at their convenience. Automated notifications keep all parties informed about the progress of dispute resolutions. These features lead to faster resolution of disputes and queries, improved visibility for all stakeholders, and enhanced customer satisfaction through transparent communication. By streamlining these interactions, businesses can maintain better relationships with their customers while reducing the workload on their AR teams.
By leveraging AR automation, businesses can overcome the traditional challenges of receivables management. This not only improves operational efficiency but also enhances customer relationships and accelerates cash flow.
At Tendro, we've designed our AR automation platform to address these pain points head-on. Our AI-driven workflows streamline the entire AR process, from invoice creation to payment reconciliation, helping businesses take control of their receivables and unlock cash from their balance sheets.
Implementing AR Automation: Transforming Your Finance Operations with Tendro
Now that we've explored the challenges in traditional AR processes and how automation can address them, let's dive into the practical aspects of implementing an AR automation solution like Tendro. Here's how our platform can revolutionize your accounts receivable management:
Seamless Integration and Onboarding
Tendro is designed to integrate smoothly with your existing systems:
- Easy connection with popular ERP and accounting software
- Minimal disruption to your current workflows
- Guided onboarding process to ensure a smooth transition
Customizable Workflows
Automation that adapts to you:
- Tailor automated communication strategies to fit your business needs
- Set up custom rules for collections based on customer segments
- Adjust dunning processes to align with your company policies
Advanced Analytics and Reporting
Gain deeper insights into your AR performance:
- Real-time dashboards showing key metrics like DSO, CEI, and staff productivity
- Customizable reports to track the metrics that matter most to your business
- Predictive analytics to forecast cash flow and identify potential risks
Multi-Channel Communication
Improve customer engagement with:
- Automated email reminders
- SMS notifications for urgent matters
- Self-service customer portals for 24/7 account access
Secure Payment Processing
Tendro offers:
- Integration with multiple payment gateways
- PCI-compliant payment portals for customers
- Support for various payment methods including ACH, credit cards, and wire transfers
AI-Powered Cash Application
Streamline your cash application process with:
- Machine learning algorithms that improve matching accuracy over time
- Automatic handling of partial payments and discounts
- Quick resolution of exceptions with AI-suggested matches
Dispute Management
Efficiently handle disputes with:
- Centralized AI-powered platform for tracking and managing disputes
- Automated workflows for internal approvals and customer communication
- Clear audit trails for compliance and reporting
The ROI of Implementing Tendro
Businesses that have implemented Tendro have seen significant improvements in their AR processes:
- 32 days average DSO reduction
- 3x increase in staff productivity
- 50% decrease in bad debt write-offs
- Improvement in customer satisfaction scores related to billing and payment
The Future of AR is Here
Cash is king. Efficient accounts receivable management is crucial for every business. By implementing an AR automation solution like Tendro, you can maximize AR efficiency, unlock working capital, and provide better experiences for both your team and customers.
Ready to transform your accounts receivable process? Contact Tendro today for a personalized demo and see how we can help your business thrive in the digital age of finance.