What is the Accounts Payable and Receivable Process

How to Implement and Optimize an Accounts Receivable Process

Whether you’re aware of it or not, you’ve probably dealt with the accounts receivable process at some point. If you’ve ever purchased a meal or ticket for a friend with the expressed intent that they’ll pay you back, you’ve essentially extended an IOU to them. Collecting on the IOU is a simplistic form of the accounts receivable end-to-end process.

Today, we’re going to dive into what is accounts payable and receivable process and how you can optimize the process for your business. 

What is an Accounts Receivable Process? 

Accounts receivable and accounts payable process (or AR / AP process flow)is the operation of extending to a customer a product or service on credit. By invoicing the client, the debt they owe the company goes into the accounts receivable book. The accounts receivable business process flow refers to the issuing and management of the invoice, and ultimately, the collection of the outstanding debt. 

These transactions occur every day, and the accounts receivable workflow process works seamlessly with the rest of a business’s operation. However, if adequate accounts receivable payment processing hasn’t been established, the whole system can fall into chaos.

The Accounts Receivables Process: Step-by-Step

Here are the basic steps you should integrate into your company’s operations to help your company develop accounts receivable processes and procedures. By following these three steps to this AR collection process flow chart, you can create and maintain an organized accounts receivable process.

  1. Begin the Accounts Receivables Process by Checking Clients Creditworthiness 

There is an inherent risk with extending credit. Even if a client has the best intentions to make good on their payments, there’s always a chance that they will miss installments or encounter circumstances that cause them to default on their obligations. 

However, to mitigate the risk, your accounts receivable process should begin with a query into your customer’s credit. This allows you to choose only the clients that have the highest probability of paying their debt. 

You can further narrow down your criteria by creating terms and protocols that your company will adhere to, including:

  • Establishing credit limits 
  • Deciding on a fixed payment period
  • Determining if your company will offer any incentive programs
  • Drafting penalties for late payments 

While this list isn’t exhaustive, it will serve as a baseline for tailoring your company’s minimum requirements. You will also need to perform a market analysis to highlight areas where competitors may be able to undercut your services so you can get the upper hand on them. 

Last, you’ll want to run a credit check on your customers. You will need a signed authorization from the customer, as well as their full legal name, date of birth, and Social Security number. Perform the check with one of the big three credit unions: Equifax, Experian, or TransUnion.

  1. Establish an Invoicing and Management Procedure

While an invoice isn’t a legal document, it is your primary tool for communicating with your customers. 

It should outline any goods or services you’ve provided, associated costs, and the due date of any outstanding balances. You should present this information in clear, complete, and understandable language to avoid any potential confusion. If any portion of the invoice is incomplete or vague, this can lead to delayed payments, as customers may need to verify necessary information.

To effectively manage the company’s invoices, you will need to ensure that your team can swiftly track any invoices. You can do this by establishing a defined numbering system. 

When you create a comprehensive system, you make the review accounts receivable process significantly easier for your team. You will be able to quickly identify overdue payments and follow procedures for collections without the need to harass your customer base.  

This system will also allow you to easily create an accounts receivable ledger you use in conjunction with your company’s balance sheet. 

  1. Define Your Company’s Accounting Method

Since your accounts receivables will make up a large bulk of your financial statements, you will need to choose how they are calculated into the final figures.

There are two methods you can use: cash-basis accounting and accrual-basis accounting.

Cash-basis accounting is the fastest method, as you only account for revenue when it’s received and when expenses are paid in full. On the books, you track accounts receivables separately from revenue.

Accrual-basis accounting records revenue at the time of the sale, as opposed to waiting for the actual payment to be in hand. 

Tips to Optimize the Accounts Receivables Process

If you’ve created your accounts receivable process based on the above steps, you’ve already started creating an optimal system. Regardless of what step you’re on, here are a few tips to make the most of your AR process:

Send Invoices Quickly

Your accounts receivable process should be designed to issue invoices immediately after any products have been shipped or services rendered. Since invoices should be approved by the client, you mitigate any delays on your end. 

Offer Convenient Payment Options 

Providing customers multiple payment options will streamline your AR process. When you make your invoicing easy, your clients should be able to seamlessly make payments. Instead of waiting for a check in the mail, you can receive a digital payment within minutes. 

Create Standard Operating Procedures for Late Payments

Having a client that is past due on their obligations is never a fun situation. However, establishing a clear action plan for when the event arises will take the pressure off your shoulders. You won’t have to make snap decisions on whether you should send an email, make a phone call, or send a “past due” invoice  — you can simply reference your protocol.

By creating an accounts receivable process, you’re on the right path to creating a profitable cash flow system. However, if you need to access funding immediately because you have clients overdue on their payments, contact L3 Funding today. We offer various merchant funding solutions that can help you close any cash flow gaps.