Accounts Receivable Explained: The Processes, Tools and Best Practices You Need to Know

When your clients or customers owe you money on invoices issued, it’s called accounts receivable and counted as an asset on your balance sheet. But, of course, it’s even better when they pay you. Managing your accounts receivable may just seem like an admin chore, but with proper attention you can ensure prompt payment and avoid delays and disputes.

What is accounts receivable?

Whatever the size of your business, maintaining a healthy cashflow is critical, and this is where accounts receivable comes into play. Accounts receivable is the amount of money that you have invoiced for products or services provided, but is yet to be paid. Although it is shown as an asset on your balance sheet, the money isn’t yet in your bank account – so there is an element of risk. Late payments and defaults will reduce the value of your accounts receivable and affect the level of cash incoming, so good accounts receivable management is important.

In effect, accounts receivable is a way of extending credit to your clients. For this reason, your terms of payment need to be set out clearly on every invoice you issue. These terms include when you expect payment and what, if any, penalties you’ll exact for late or nonpayment, such as interest on the amount outstanding.

Reasons why accounts receivable turns from asset to liability

No matter what your business does or where you are based, there will be times when your customers let you down. Occasionally, it could be your fault – if you fail to issue invoices correctly – but just as often it’s the fault of your client. Here are some of the reasons for delays or defaults on your accounts receivable:

• Your client is inefficient and habitually pays late
• Your client pays late as a strategy to manage their own cashflow
• Your client is experiencing financial difficulties and defaults
• You failed to issue an invoice
• You sent the invoice to the wrong person or address

The challenge of your accounts receivable business process is to minimize this risk by setting up an effective accounts receivable process flow using best practices and automation. The result will be improved cashflow and fewer defaults.

The benefits of accounts receivable management best practices

The benefits of accounts receivable automation and management are more than just incoming cashflow. In an increasingly complex payments environment, taking a strategic approach to managing accounts payable and receivable can bring tangible benefits to your business and enhance global growth.

Clear benefits from accounts receivable and payable management include:

• Improved liquidity and solvency – better cashflow will allow your business to operate more smoothly
• Improved perception of your business’s financial health – letting your accounts receivable climb too high indicates poor credit management
• Reduced costs – the better you manage your accounts receivable the lower your debt collection costs will be
• Improved cash flow forecasting is another benefit of a good accounts receivable and accounts payable process
• A well-designed accounts receivable invoicing process will reduce the level of bad debt you experience
• Using the best accounts receivable software solutions will improve operational efficiency and streamline your process flow
• Regular reviews of customer payment behavior can identify problem customers and inform decisions on which customers to extend further credit to

Accounts receivable automation

Identifying the best accounts receivable solutions for your business will go a long way towards putting you in control of your cashflow – and accounts receivable automation tools take the hard work out of the process. Learning how to automate your accounts receivable process flow can streamline your operations and accrue multiple benefits, no matter the size of your business. When you use a payment solution provider like Payoneer, you may be able to automate parts of your accounts receivable process, depending on your business needs.

The benefits of automizing your accounts receivable solutions include:

• Automated accounts receivable can expedite getting paid by clients – automated invoicing is more accurate, saves time and improves accountability
• When routine tasks are automated, employees can focus attention on more value-added tasks
• Scheduling automated payment requests and reminders to customers makes them aware of impending payments and reduces delays caused by carelessness
• Automated invoicing reduces human errors that might result in non-payment
• If you use Payoneer’s invoicing and payment collection capabilities, you may be able to streamline certain accounts receivable workflows. Depending on your location and account type, Payoneer may provide access to supporting documentation related to international payments. Availability and fees are subject to applicable terms and may vary.
• As well as automating your accounts receivable, Payoneer can provide receiving account capabilities that can help simplify the payment experience for international clients, where available. 

To get the best out of an automated accounts receivable software solution, you should look for a package that synchronizes easily with your existing payment platform. Or depending on your requirements, Payoneer’s invoicing tools may be able to reduce the need for additional software.

Further ways to optimize accounts receivable

Reviewing your credit management processes is one of the most effective ways to keep accounts receivable under control. Extending credit to clients can help increase revenue, but it also means you need a clear understanding of each customer’s creditworthiness to reduce the risk of bad debt. A well-designed credit application process should gather the information needed to make responsible credit decisions, while partnering with a reputable credit reporting agency can provide additional insight.

Good credit management also depends on regular monitoring. Credit limits should be reviewed consistently, supported by payment trend analysis and performance metrics that help identify potential problems before they escalate. This makes it easier to spot late-payment patterns, review customer payment histories, and take action early.

Finally, businesses should make sure they have a robust and speedy dispute resolution process, with full transparency around how disputes are handled. Stronger customer relationships can also support healthier accounts receivable, especially when businesses offer flexible payment terms such as early payment discounts, partial upfront payments for first-time clients, or extended credit for proven good payers.