Definition of Accounts Receivable Process
Accounts Receivable Process includes process of collecting money, setting up policies and procedures, deciding the credit period, maintaining the detailed records of each process, deciding on discounting of receivables, decision about extending the process etc. so as to manage the operating activities of the organizations in efficient and effective manner.
The business needs to give different payment facilities to its customers and for this organization gives credit to the large customers. Accounts receivables include debtors, amount given on loan etc. There is always requirement of management of accounts receivables. The accounts receivable process includes management of debtors, deciding the credit policies, deciding the payment mode, deciding the discounting policies, deciding the criteria for cash discounts, trade discounts etc. An effective accounts receivables management helps the organization to perform better and manage the working capital cycle properly. It is the management or analysis of whether it is better to receive the amount after due date or to allow the cash discounts and receive the payment now. The effective management of accounts receivables depends upon the effective accounts receivable process.
Steps of Accounts Receivable Process
Following are the major steps included in Accounts Receivable Process:
1. Determining the Average Receivables
For effective accounts receivable process it is necessary to determine the receivable i.e., average receivables during the year so that minimum lock in amount can be determined and to manage the working capital and liquidity of the organization. Determining the average receivables enables the organization to maintain the liquidity ratio and plan the future liquidity activities.
2. Determining the Credit Policies
Determining the effective credit policies helps in better management of the accounts receivables process. Credit policyrefers to deciding the period of credit to be given to the customers. For different customers there are different credit policies. The credit policies are decided by the amount to be received, creditworthiness of customers, the market standing and relations with the other dealers. The banks will decide the accounts receivable on the basis of credit worthiness, income, market standing of client. The accounts receivable process also involves the deciding penalties for late payments by the customers.
3. Invoicing Practices and Policy
Accounts receivable process includes the invoicing policy like when to invoice the bill i.e., after receipt of amount or dispatch of goods or advance receipt of money or confirmation of order etc. The terms of service and payment are to be clearly mentioned on the invoice so as to clarify the terms of the agreement and maintain the transparent relation with the customers. Accounts receivable process is basically managing the accounts and giving facilities to the customers so as to maintain the long term relationship with the customers. For banks it is deciding the monthly installments and giving the easy facilities like direct deduction of EMI from accounts and giving the minimum extension for payment of monthly installments.
4. Accounting of Receivables
Accounting of accounts receivables is important for every organization so as to track the records and maintain the details of the customers in data. Accounting involves recording of invoice in the system, set the due dates for receipt, ensures the receipt on the due date, adjustment entries, recording and accounting of bad debts etc.
5. Establishing the Automation Process
The organization can manage the accounts receivables by establishing of automation of accounts receivable process like setting the reminders about collections on due date, displaying the long pending debts, setting the authority login who can make entries in the system and view the data, combining the inventory with the accounts, automation of reconciliation, or display of discrepancies etc. With the automation of accounts receivable the organization can manage the accounts receivables in a better and effective ways.
6. Establishing the Discounts and Rewards Policy
Accounts receivable process involves setting up effective discounts policy so as to retain the customers and reward policies like free coupons and free gifts to the customers. The process also involves the cost effective ways of collecting process.
7. Maintaining the Future Relations and Policies
The process also involves maintaining the future relations with customers like follow up for next order, giving variety to the existing customers, giving extra benefits to theexisting customers, building more business opportunities by tie up and partnerships for large customers etc. so as to maintain the future relations and expand the business in future.
Evolution of Accounts Receivable Process
For proper accounts receivables process, there needs to be proper and effective accounts receivables and its management. The large organization many times fails to manage the receivables due to large number of receivables and manual accounting. It becomes difficult for them to manage the accounts receivables and involves huge cost as well. It gives rise to the management and setting up the effective accounts receivable process.
Also, lots of paper work gives rise to evolution of accounts receivable process.This includes electronic billing process, outsourcing the collection of debtors due to high risk of bad debts and large travelling expenses, setting up the process of digital receipt due to various facilities and time saving process because of digitization, giving coupons of discounts to the customers due to competition, setting up the process of online complains, feedback and the query solving process so as to retain the customers and receivables for the growth of business.
Accounts Receivable process involves the management of the receivables so as to maintain good relations with the customers and managing the cost in an effective way. The accounts receivable process involves setting up the credit policies, giving the aftersale services, managing the payment process, deciding whether to outsource the collection process or to collect by itself on the basis of evaluation of the cost involved. The accounts receivable process also involves the discounting and credit policies to the customers. The process of managing accounts receivables for different entities is different for every organization like businesses manage it by outsourcing the collection process and banks manages by decision on whether to extend the credit period or issue the warning of selling the security. Thus, accounts receivable process is very important for organization as it relates with the working capital management and maintaining the liquidity.
This is a guide to Accounts Receivable Process. Here we also discuss the definition and steps of accounts receivable process along with evolution of accounts receivable process. You may also have a look at the following articles to learn more –