How to Do Accounts Receivable: A Step-by-Step Process

Accounts receivable (AR) represents money that customers owe a business for goods or services already delivered but not yet paid for. It is recorded as a current asset on a company’s balance sheet, signifying funds expected to be collected within a short period, typically less than a year. This financial component is fundamental for a business’s cash flow, as it directly impacts the liquidity available for operations, investments, and growth. Effective management of accounts receivable ensures a steady inflow of cash, helping to cover expenses and maintain financial stability. Without proper AR processes, businesses can face challenges like reduced cash flow and increased risk of uncollected debt.

Establishing Accounts Receivable Policies

Before engaging in accounts receivable activities, a business must establish clear policies to guide its credit and collection efforts. This includes defining credit terms, which specify the conditions under which a seller extends credit to a buyer. Common credit terms include “Net 30,” meaning payment is due within 30 days of the invoice date, or “Net 60” or “Net 90” for longer periods. Some terms might also offer discounts for early payment, such as “2/10 Net 30,” providing a 2% discount if paid within 10 days, with the full amount due in 30 days.

Businesses also need to decide on the payment methods they will accept, such as bank transfers, credit cards, or checks, considering associated fees and processing times. This decision impacts both convenience for the customer and the efficiency of internal operations. For new customers, especially when extending credit, a process for vetting creditworthiness may be necessary; this could involve checking credit references or requiring a partial upfront deposit. An organized system for tracking accounts receivable is essential, whether it’s a manual spreadsheet for smaller operations or dedicated accounting software that automates much of the process. Automated systems can significantly reduce errors and improve efficiency in managing receivables.

Generating and Sending Invoices

Once policies are in place, the next step involves creating and dispatching invoices to customers. An invoice serves as a formal request for payment and a record of the transaction. Each invoice should contain essential components to ensure clarity and accuracy. These typically include a unique invoice number, the date the invoice was issued, and detailed contact information for both the business and the customer.

The invoice itemizes the goods or services provided, including descriptions, quantities, unit prices, and the total amount. It must also state the total amount due, the agreed-upon payment terms, and the due date. Invoices can be generated using various methods, from simple templates in word processors to comprehensive accounting software, which automates the creation process and can integrate with other financial systems. Sending methods vary, with email being a common, fast, and cost-effective option, often attaching the invoice as a PDF. Other methods include traditional mail or electronic portals, depending on customer preference and business capabilities.

Processing Customer Payments

Upon receipt of a customer’s payment, the processing phase begins, focusing on accurate recording and application of funds. The initial step involves receiving the payment through various channels like direct bank transfers, credit card transactions, or physical checks. Each payment must be promptly logged into the accounts receivable system, noting the date, amount received, and the payment method used.

It is crucial to apply the payment to the correct customer account and the corresponding invoice. This ensures that the customer’s balance is updated and that invoices are marked as paid. For credit card payments, this involves processing through a merchant service provider, while checks require deposit. After a payment is processed and applied, issuing a receipt or confirmation to the customer is good practice. This step provides proof of transaction for the customer and reinforces trust, while also serving as an internal record.

Managing Overdue Accounts

Despite clear policies and efficient invoicing, some accounts may become overdue, necessitating a structured approach to collection. A systematic follow-up process addresses invoices that have passed their due date. Initial steps often involve sending polite reminder emails shortly after the due date. If payments remain uncollected, follow-up communication may become more direct, potentially involving phone calls.

Maintaining clear documentation of all collection efforts is important, including dates of contact, communication methods, and agreements made. This record is valuable for internal tracking and resolving disputes. Consistency and professionalism are key to encourage payment while preserving customer relationships. For persistently overdue accounts, businesses might consider sending formal notices or engaging a collection agency.

Reconciling Accounts Receivable Records

Reconciling accounts receivable records is a periodic verification process ensuring the accuracy of a business’s financial data. This involves comparing the balance in the accounts receivable ledger, which details what each customer owes, with the overall accounts receivable balance in the general ledger. The goal is to identify and resolve discrepancies that may exist between these records.

Common discrepancies arise from unapplied payments, where a payment was received but not correctly matched to an invoice, or from incorrect invoice applications. Missing payments or data entry errors can also lead to imbalances. This reconciliation is typically performed monthly, aligning with the closing of financial books and financial statements. Regular and accurate reconciliation ensures that financial reports are reliable, providing a true picture of the business’s financial health and aiding in financial planning.