What is accounts receivable?

Accounts receivable (AR) is the money owed to your business on outstanding invoices – payments for goods and services that you’ve already provided. This money is registered as an asset in your business accounts as it represents a future stream of cash coming into the business. It directly affects your working capital, and the availability of cash to continue operating. Good management of AR business includes billing and invoicing, payment monitoring and processing, chasing clients if payment becomes overdue, implementing collection and credit strategies.

Effective AR management optimizes your cashflow and minimizes the risk of bad debt. It’s an important element of your overall liquidity and operational effectiveness, and how you manage AR business directly affects your ongoing customer relationships.

The opposite of AR is accounts payable (AP), which is the money you owe to other businesses for goods and services received.

The accounts receivable process – step by step

A good AR management can be broken down into a process of eight steps, known as the AR workflow. Let’s take a look.

1. Credit assessment and approval – before the first goods have been delivered to a new client, or the first invoice issued, you’ll need to assess that client’s creditworthiness. Checking their financial history and credit rating can prevent collection problems later.

2. Agree payment terms – this ensures that your clients understand your expectations with regard to the timing of payments for goods and services provided. It’s important for you to know when your invoices will be paid, so you can predict cashflow. This means it’s important for your clients to understand when they need to pay, and to make payments on time. Standard payment terms tend to be 30, 60 or 90 days, while there is scope to offer small discounts for earlier payment. You might also include late fees in your payment terms, to deter late payment. If you operate  a small business, you’ll want to negotiate the shortest possible payment terms to keep your cashflow healthy.

3. Invoicing – it’s important to issue clear and detailed invoices as soon as goods or services have been delivered. Include what the invoice covers, the amount due and your payment terms. Fast and accurate invoicing lessens the scope for payment disputes.

4. Recording transactions – keeping precise records of AR is essential for you to be able to track the amount of cash owed to you and the likely timing of its receipt.

5. Monitoring AR – the ability to track outstanding invoices is a necessity. The best way is to use aging reports so you can see, at a glance, how much is owed and when payment is due. This will enable you to see clients that have overdue invoices, so you can take collection action and, if necessary, put a stop on their account to prevent further debt from building. If collection efforts are exhausted without payment, the uncollected AR is written off as bad debt.

6. Collecting payments – use a system of reminders to nudge outstanding invoices, including calls to discuss payment plans if necessary. A professional approach to payment collection can ensure smooth payment and help to maintain good customer relationships.

7. Recording payments – match incoming payments to invoices in your accounts to ensure good records and clarity over your business’ cash flow.

8. Reconciliation and reporting – reconcile your AR accounting with your bank statements and use the information to analyze your AR process. This will allow you to see any weak areas, improve your process and understand the impact of AR cashflow on your business.

Why is accounts receivable important?

Managing AR is, in effect, managing the cashflow of your business, the importance of which cannot be underestimated. It’s a vital element to your liquidity, and is one of the metrics that credit issuers and investors will look at when considering the health of your business. A good track record of AR management may enable you to secure AR financing if you ever need to borrow money using your AR as security. Poor AR management precludes AR financing and contributes to a loss of investor confidence – and is totally avoidable.

When you successfully manage your AR, it can have a number of beneficial effects on business outcomes, including:

• Cashflow optimization – cash is the lifeline of your company, so being able to predict the timing of AR payments puts you in control of your working capital. This is essential to carry out your day-to-day business, as well as for expansion, capital investment, and overall growth strategies.
• Customer relationship management – professional and timely AR management contributes to forging good customer relations, enabling long-term stability and predictability.
• Financial health monitoring – days sales outstanding is a key AR metric which can give you valuable insight into future cashflow challenges and the strengths and weaknesses of your AR management.
• Operational excellence – good AR management can drive your business forward, especially if you optimize your credit and collection policies.
• Stakeholder confidence – keeping your AR tightly controlled and monitored illustrates to stakeholders and business partners that you understand the importance of proficient financial management.
• Access to capital – competence in AR management will contribute to your ability to secure credit and improve your financing terms.

So much for the benefits. But AR can present risks too, if you don’t adequately keep on top of it. The longer invoices go unpaid, the more likely debtors are to default. This decimates a business’s cashflow and also increases collection expenses. High levels of AR means your company isn’t receiving the cash you need to operate, putting you under greater financial pressure and increasing your own need for credit. Having working capital tied up in AR for too long is furthermore an opportunity cost, affecting your company’s ability to expand and invest in the future. These problems, in turn, will put potential investors off your company and make it difficult for you to gain credit.

Best practice for accounts receivable

There are multiple ways in which you can ensure that you reap the rewards of AR, rather than suffering the risks. Adopting the following practices should enable you to collect monies due in a timely fashion, while maintaining strong customer relationships and keeping collection costs to a minimum.

Best practice strategies for AR start with establishing your credit policy. This means working out a structure for offering credit to new and existing customers on the basis of set criteria. It will cover the terms of credit and identify clients who will be required to settle their account immediately. Ensuring that your company adheres to the credit policy will reduce the likelihood of bad debt. Having a clear policy will make it easier for your employees to decline credit when necessary, and ensure that customers who are denied credit don’t take it as a personal slight.

Next, giving your clients multiple payment options removes barriers that might slow settlement. Using an online payment platform such as Payoneer makes cross-border payments quick and straightforward – no more ‘the check’s in the post’ excuses.

You can also offer your clients an incentive in the form of a small discount for early or immediate payment. For example, maybe offer a 3% discount for invoices settled within 10 days of issue. Conversely, set it out in your terms that you will charge customers for late settlement of invoices.

Setting out standard procedures for overdue invoices is very important. Your accounts department should know precisely how to proceed once payments become overdue. There should be a fixed procedure of reminders and follow-ups, including telephone calls if necessary. If payment is still not forthcoming, the situation can be escalated for further action to ensure collection. Follow your outlined procedure without exception.

AR strategy also involves formulating a procedure to handle disputes. A clear process will help your team handle any arguments over payments that might arise, enabling disputes to be settled more quickly and hopefully maintaining good customer relations.

It goes without saying that it’s essential to keep track of late payments and repeat offenders. Reviewing all outstanding accounts regularly avoids unexpected fluctuations in cashflow and enables better financial planning.

Using AR key performance indicators to measure efficiency helps you to improve your AR processes across the board and spot problems earlier. AR KPIs include days sales outstanding, average days delinquent, AR turnover ratio and collections effectiveness index. Update your AR strategies regularly to improve on each of these KPIs.

Keeping customer information up to date is not to be taken for granted. Make sure contact details, billing information, and account status are reviewed and refreshed regularly to avoid invoicing delays or miscommunications that may impact timely payment. In parallel, it’s essential to train both new and existing AR staff to ensure adherence to best practices. This not only improves overall efficiency and reduces the likelihood of errors, but also empowers your team to handle complex situations or customer disputes with greater confidence and professionalism.

Last but not least, automate your AR workflow. If you use a payment platform like Payoneer to automate your AR workflow, you’ll be able to keep track of your AR much more easily, and every step of the AR process will kick in at the right moment. Electronic invoicing and online payments feed into automated record keeping and analysis – lessening the chance of human error at every stage of the process. Standard tasks will be taken care of, leaving your accounting staff to deal with issues quickly and streamline their decisions for more effective AR management.

Automating your accounts receivable with Payoneer

Using accounting software or a payment platform like Payoneer to automate your AR process is a no brainer. Automation streamlines the workflow and cuts down the amount of time staff spend on routine tasks. The AR process is completed accurately and on time, every time, and the result will be a more efficient flow of cash into your business.

Payoneer makes receiving payments simple and straightforward, no matter where in the world you or your clients are based. The benefits to your business of using Payoneer to manage your AR are clear:

• Payoneer is a cost effective and versatile way to accept payment from clients all over the world.
• You’ll be able to take payment in nearly 200 countries, and in 70+ different currencies – allowing your customers to make payments to a local receiving account. When it’s easier for them to pay you, they’re more likely to pay on time.
• Payoneer can track your AR, send invoices and reminders and keep you informed of payment progress.
• Payoneer can automate the steps of your AR process. Invoicing is automated using templates and by setting up recurring invoices for installments or subscriptions. Payment reminders are also automated.
• Payoneer integrates seamlessly with Quickbooks and other accounting software, allowing the automation of invoice reconciliation and providing you with details of AR KPIs.
  

Putting Payoneer in charge of your AR puts you in charge of your money

Managing your AR efficiently can have a real impact on your cashflow – and this in turn impacts the success of your business. By automating your AR workflow, you’ll take the guesswork out of cashflow forecasting and you’ll ensure that invoices are paid in a timely manner. Establishing credit terms, enabling easy payment and regularly monitoring AR all contribute to an improved cashflow. Payoneer’s ability to manage your AR automatically reduces human error and optimizes incoming payments, putting your business on a firm financial footing to face the future.

Frequently asked questions 

• What are accounts receivable best practices for global service providers?

There are a number of recognized AR best practices which you should follow:

• Standardize invoicing across clients in all geographical regions
• Establish clear payment terms from the outset
• Streamline international transactions by using a multi-currency payment platform such as Payoneer
• Payoneer can also enable AR automation for speed and efficiency
• Monitor AR KPIs on a regular basis to spot problems early
• Establish a firm process for dealing with overdue payments
• Ensure compliance with all local tax regimes

• How can I automate my AR process to save time?

Using an online payment platform such as Payoneer to manage receivables is essential for best AR practices. It can generate, send and track invoices, including sending automated payment reminders. Payoneer will integrate with your accounting system and provide automated invoice reconciliation, as well as dealing with currency conversion and cross-border transfers.

• What is the best way to track invoices and receivables?

With a centralized AR dashboard, you’ll be able to automate status updates on all invoicing and AR. Payoneer can help you by tracking invoices and setting collection priorities, giving you instant access to AR performance data. It can even integrate tracking tools with your CRM or project management system.

• How can Payoneer help me get paid faster?

Payoneer helps you get paid faster in multiple ways:

• Local receiving accounts enable customers to pay in their own currency
• Payoneer cross-border transfers are much quicker than traditional bank transfers
• Payoneer can automate invoicing and tracking, and automatically send out reminders to clients whose accounts are overdue
• Payoneer gives you real-time status updates on payment progress
• You can access payments faster with instant withdrawal options to your local bank account
• Payoneer’s fees are highly competitive, making managing your AR more cost effective

• How do I manage international receivables efficiently?

By using Payoneer, you gain access to multi-currency invoicing and reporting. Your clients can pay into local receiving accounts, while you can leverage currency conversion to minimize losses. Payoneer also ensures compliance wherever you accept payments and contributes to your overall AR efficiency with automated processing.

• What tools are available for AR automation?

AR automation is essential for the most efficient and effective AR management. Using Payoneer to receive global payments simplifies your AR processes, and the platform can integrate seamlessly with accounting software such as QuickBooks, Xero, Zoho Books, as well as with ERP systems and CRM platforms.

• How can I reduce late payments from global clients?

The best way to reduce late payments from global clients is to establish a system of automated reminders and follow-ups, setting out clear due dates and contract terms. Payoneer can provide this, as well as automated invoicing. Incentivize your clients to pay early with discount offers, and deter late payment by the imposition of fees and charges. Making it easy for clients to make payments in their own currency to local receiving accounts, a feature of Payoneer, also helps.

• What are common AR mistakes global service providers should avoid?

These are the common AR mistakes that are easily avoidable:

• Late and inconsistent invoicing
• Lack of clarity over payment terms
• No follow-up on overdue invoices
• The introduction of human error due to a failure to automate
• Failing to comply with currency or tax regulations in cross-border transfers
• Omitting to reconcile accounts regularly

• Can I use Payoneer to manage AR across multiple currencies?

Payoneer is a payment platform designed to facilitate cross-border payments. It enables you to use multi-currency receiving accounts, and will automate invoicing and payment collection. Its currency conversion rates are highly competitive, and currency conversion can be automated.

• What is the role of invoice tracking in effective AR management?

Invoice tracking is essential for efficient AR management. As AR represents future cashflow into your company, you need to keep on top of outstanding invoices and overdue payments. Invoice tracking enables you to monitor the status of all outstanding invoices, and provides information on when follow-ups are due. This in turn will improve your cashflow forecasting, while clear records enable swift dispute resolution and improve client accountability and transparency.