From invoicing to collections, accounts receivable (AR) accounting is how you literally get paid. However, there is a lot of data and steps along the way. Data errors or missteps cause everything from delays to entirely missing out on income. That being said, there are ways to streamline and enhance the entire process.
A major factor behind this is connected, reliable accounting software. Let’s look at how you can improve the entire accounts receivable lifecycle for more efficient bookkeeping and faster revenue recognition.
The Basics of Accounts Receivable Accounting
Before learning how to improve your accounts receivable, let’s clarify what it is and how it affects your financial health.
What is Accounts Receivable?
Accounts receivable defines the balance a company is owed once products or services are delivered. But, the amount isn’t been paid by the customer, yet. Additionally, this describes the amount of money that customers owe for transactions made on credit. On the balance sheet, accounts receivable is categorized as an asset. This is because the money is guaranteed to the company by law.
Accounts receivable creates a line of credit that is extended by companies to consumers. Furthermore, this line of credit outlines terms and payment expectations to be fulfilled within a certain time. The accounts receivable turnover ratio is the measurement of how efficiently customer payments are received once services or products are delivered. More importantly, this turnover rate is used to determine the effectiveness of your financial management and ensuring you have steady cash flow. The accounts receivable turnover ratio can be either high or low.
A high turnover rate is good. This indicates that customer payments are being received and processed efficiently, with a short turnaround time. But, it’s important to make sure that your credit policy isn’t too rigid. This may turn off buyers who rely on credit to pay for services.
Lower turnover rates generally indicate that customers take longer to pay their balance. Unfortunately, this stems from several things. It results from poor collection processes, or it indicates your customers are financially uncertain. Companies should reexamine their credit policies and adjust them to spur more timely payments. Additionally, other collections-related or technical issues could persist which need to be addressed.
Improving Accounts Receivable
Here are things you can do to assess and improve your AR right now.
Use the Right Accounts Receivable Software
Everyone wants to get paid on time. Like all other business functions, this is a process that usually begins with the right technology. Reliable accounts receivable software is important both for logistical purposes and for efficient, timely bookkeeping. Choose a simple solution that you can completely customize to suit your unique processes and credit policies. Besides raw processing power, you need the technical dexterity to run reports and gather real-time data to pinpoint what’s causing your accounts receivable turnover rate.
Use Aging Reports
Firstly, develop AR aging reports periodically to track how your accounts receivable is paid and processed. This report indicates the payment statuses of customers, which gives you an idea of payment trends and customer behavior. Additionally, it helps you track amounts due in respect to a defined period of time, such as 30 days since billing was issued. Also, this lets you calculate and track your accounts receivable turnover ratio which is very valuable. Gauging how high or low your turnover rate is will indicate how much correction is needed. It will also determine customer reliability.
Efficient accounts receivable begins with an accurate and fast billing cycle. If you haven’t already, consider automating your invoicing and collection processes. Products like Accounting Seed let you automate all of the accounting generated by your sales pipeline. In fact, Accounting Seed’s billing automation lets users generate an invoice and establish recurring billing plans with just a click. Simply click to the next step with no hassle on your end. This is essential for eliminating delays or errors on your end that may contribute to low accounts receivable turnover.
Follow-Up with Past Dues Immediately
When customers miss the payment date, don’t delay when reaching out to them. Creating communication is the best way to get the payment process underway. Or, at least, gauge when you will receive the expected payment. Depending on your system, these messages can be generated and sent to customers automatically based on their payment status.
Introduce or Adjust Payment Plans
One way to improve your accounts receivable management is to offer payment plans to customers. This is a great way to bring in steady, sustainable income and assuage prospective customers’ fears of a big bill to pay. This is a good opportunity to establish clearer, more flexible terms and institute more effective billing cycles. Maybe this is an opportunity to introduce deferred revenue or pivot your current plans to offer smaller payments over a longer time. Regardless, payment plans are more manageable for customers, which makes it more likely you’ll receive income sooner.
Accounting Seed Accounts Receivable Software
Accounting Seed’s software manages the entire invoicing and collections process by automatically generating invoices, collection notices, and more.
Analyze the real-time data of customer activity, aging balances, and more with easily configurable dashboards and reports. Send customers custom-templated reminders and record all activity to maintain the visibility of your accounting lifecycle. Our solution focuses on helping you create more seamless cash flows by bridging the gap between invoice/payment cycles with only a button click.
On Salesforce? Even better! As a native Salesforce accounting software, Accounting Seed enables you to manage the entire financial life cycle from quote to accounts payable all on Salesforce. One view, one click, and you’re on your way to getting paid and serving your customers.