If you’re a new business owner or recently switched from cash to accrual accounting, you may not know about accounts receivable. Receivables are vital in the accounting cycle. Due to the fact that receivables are considered revenue, their total affects your net income immediately, but not your retained earnings. Accounts receivable is also a non-closing account.
The Basics of Accounts Receivable
When a business permits a client to immediately possess a product or a service in exchange for a promise to pay, an account receivable is created and shown in the general ledger. Account receivables refer to the money owed to a company for the goods and services given to customers on a credit basis
You can look at it from the same angle as you would look at a credit card company — when a business accepts credit cards, it’s basically the same concept, except you take on the risk instead of the credit card company in case the customer doesn’t pay.
The accounts receivable process is meant to help growth and profitability by ensuring a steady flow of cash, so it’s imperative for business owners to handle their accounts receivable efficiently.
However, there are certain things you need to establish as a business before you extend credit to anyone (as outlined below).
Create and Send Invoices
Invoicing customers is crucial to any business, so make sure to create an accounts receivable invoice for your customers as soon as possible, preferably immediately.
Suppose you sell a customer 500€ worth of bubble gum, and tax them an additional 105€ in VAT. Regardless of how you’re entering invoices into a balance sheet, you would put your accounts receivable for 605€ into your assets on the balance sheet, as they pose a future economic benefit. However, now your company is owed the same amount of money by the customer.
Invoicing your customers as soon as possible ensures that payment is received as soon as possible. So don’t postpone invoicing for a week. Instead, the invoice should be prepared and sent to the consumer as soon as the sale is completed. Another great piece of advice is to use accounting software, which allows a degree of automation when invoicing your customers.
Electronic invoices make the payment process easier and allow the seller real-time information about the payment progress. This is accomplished by giving links to payment options, such as direct debit, credit card, and other online payment methods, in the invoice. Additionally, you want to make sure that both the invoice amount and payment terms are prominently displayed on your invoice. For example, if you want to get paid in 60 days, make sure that the due date and the amount of money are clearly written on the bill.
It’s critical to keep track of your accounts receivable amounts and balances. This ensures your consumers are made aware of payment due dates as they approach and follow up on late payments. You may run a weekly accounts receivable report to discover which customer accounts are past due and which will be due soon.
This way, you’ll have better insight into when payments are due. Make sure to send a kind note to your customers that their payment is due soon. A quick email reminder usually does the trick, but you can also opt for automated SMS. However, once the invoice due date has gone without payment, be sure to contact your consumers immediately.
Once the accounts receivable management software is integrated with your accounting system, you can plan your collection strategy, including how to manage late payments and customers that refuse to pay.
Both big and small businesses should generate an invoice aging report to keep track of outstanding invoices, categorized by how many days they are past due, also called DSO (Days Sales Outstanding). This includes data from current invoices, overdue invoices by 0 to 30 days, 31 to 60 days, 61 to 90 days, and more than 90 days . The invoice age analysis allows business owners to estimate bad debt accrual and identify invoices that require more attention.
How to Manage Accounts Receivable
The majority of clients are likely to use digital technologies, so digitizing the process is a sensible move to keep ahead of the competition and meet customer expectations. Accounts receivable management software can help with this.
Invoices and payment due dates are tracked via an automated AR solution, such as AiVidens, an artificial intelligence solution that allows you to track everything from credit applications to customer payments forecasts and payment history.
Try Different Collections Strategies
Inquire as to what works best for your customers in terms of cash flow. Some will prefer monthly billing, while others will opt for weekly billing. The time range for receiving payment must be agreed upon by both parties. A business agreement explaining the company’s requirements as well as a customer’s responsibilities is made.
Within the contractual framework, you can adopt different collection strategies. For instance, some focus on risk reduction or cash collection (or both). Other strategies rely on customer types or specific periods of time.
With AiVidens, you can simulate each collection strategy and get results in a summary of workload and priorities to focus on.
Segment Customers Based on Behavior
Automated software offers prediction algorithms that help you distinguish the different payment behaviors of your customers and their variations over time. This will allow you to determine your profitability, timing, and collection complexity, allowing you to implement the most efficient collection strategy.
Be Proactive with Collections
Making sure all parties are on the same page about payment deadlines, amounts owed, and payment methods is one of the most critical steps in assuring on-time payment. You should also make it as simple as possible for your clients to pay their invoices. For example, make sure your invoices are clear and thorough, with no missing information that could cause your client’s accounting department to delay payment.
Predict Cash Gaps
Cash gaps can generate major problems for business owners. However, it’s entirely possible to detect a liquidity gap before it occurs and to use this information to prevent major issues for your business operations.
Streamline Accounts Receivable With AI
Accounts receivables are important processes that allow businesses to sell goods and services on credit, but they can be messy to manage manually. To save time and brain power invested into what seems like endless strings of numbers associated with manual labor, we suggest that you streamline accounts receivable with AI software like AiVidens. If you’re interested, you can book a demo.