Accounts receivable automation: Streamlining collections

Could your accounts receivable collection process use an overhaul?

These accounts receivable collection strategies can give you more control over your cash flow, reduce late payments, and improve your company's overall financial health.

What are accounts receivable collections?

Accounts receivable collections (or AR collections) refer to the steps a company takes in trying to collect money from customers who haven't paid yet.

Sometimes, businesses let customers buy things now and pay for them later. Think of your local electric supplier, which allows you to run up a month’s worth of electricity before requiring you to pay. This is called selling on credit.

The money that customers owe to the company is known as "accounts receivable"—these are funds that the business has a right to collect because the company already provided the products or services that the customers ordered or requested.

If companies go too long without getting paid, they won't have enough cash to pay their own bills. In that sense, cash is like the lifeblood of a business. It needs to flow in before it can flow out, allowing the business to operate smoothly and stay financially healthy.

What is the accounts receivable collections process?

While each step of the accounts receivable collections process can be broken down further, there are seven key steps to accounts receivable management and accounts receivable collections.

1. Create and send the invoice

The first step in the accounts receivable process is to draft detailed invoices immediately after your products or services are provided, making sure that all information is correct.

Include all the essential details, such as the unique invoice number, the date of the invoice, the payment due date, a full list of itemized charges, the total amount due, and any payment instructions.

Once the invoice has been checked and approved, send it promptly—preferably via email or an electronic accounts receivable invoicing system—to the appropriate customer contact.

2. Record the amount owed in your accounts receivable

Remember to record the invoice in your accounting system with your accounts receivable.

One of the most important aspects of strong accounts receivable management is maintaining up-to-date records for each customer.

3. Monitor your receivables and track their aging

Prepare an accounts receivable aging report to categorize your outstanding invoices by how long they've been overdue (e.g., 0–30 days, 31–60 days, and so on).

This will help you spot overdue accounts early to take timely action in collecting accounts receivable that have come due or that are now overdue.

4. Send payment reminders and follow-ups

Send a friendly reminder shortly before or after your payment deadlines. These can (and should) be automated, especially for past-due accounts.

If you still don't receive payment, follow up with more formal reminders or phone calls at regular intervals. Be sure to keep records of all communications for reference.

5. Resolve any disputes or queries

If a customer raises a concern about an invoice, address it promptly. Sometimes a slow collections process can be due to an invoice error or a simple misunderstanding.

Work collaboratively with your customers to resolve disputes, including correcting invoices or adjusting terms as needed.

6. Negotiate payment arrangements

Sometimes, your customer may be facing financial difficulties. They want to pay you, but they don't have the cash flow they need to pay in full.

Offering a payment plan or adjusted payment schedule can make past-due payments easier on your customer while collecting at least part of your money owed.

Accepting partial payments during the collections process can help your own cash flow (and financial health) while taking positive steps toward settling the full amount.

7. Apply escalation procedures

If you do need to send a final notice, send a formal demand letter that clearly states your intent to take further action if payment isn't received by a specific date. Be polite, professional, and firm.

Consider hiring a collection agency to recover the past-due debt, even if it means writing off some portion of your accounts receivable as part of the debt collection process.

As a last resort, consider initiating legal proceedings to collect the past-due amount.

How do you record accounts receivable collections?

To record accounts receivable collections, you need to make an accounting entry that reflects the cash you receive from the customer, reducing the amount they owe by the same amount.

Here's how to do it:

• Debit the cash accountsome text
  • Debit the cash account (such as your bank checking account) to increase your cash balance, reflecting the money received.
• Credit the accounts receivable accountsome text
  • Credit the accounts receivable account to decrease the money owed by that customer.

Journal entry example

Let's say a customer owes you $5,000 and they pay you $1,000 on a payment plan.

Your accounts receivable collection journal entry is as simple as this:

• Debit: Cash ...................... $1,000
• Credit: Accounts Receivable ....... $1,000

The entry updates your financial records to show that your cash has increased while your accounts receivable have decreased by the same amount, accurately reflecting the collection of payment from the customer.

Your accounting software should let you credit the payment to the specific customer's account and even a specific invoice, helping you keep up with your collections process.

Tips to improve your accounts receivable management

These tips for collecting accounts receivable can help you streamline your accounts receivable collection process while improving your cash flow and strengthening your company's financial health.

Assess your customers' credit risk

Before you extend credit to new customers, evaluate their creditworthiness by running credit checks. The best way to improve your accounts receivable collection is to minimize those overdue payments in the first place.

Review and update your payment terms

Well-structured payment terms can encourage customers to pay in a timely manner. To help ensure timely payment, be sure to include your payment terms on all unpaid invoices.

Consider early payment discounts

If you want to reduce late payments and improve your cash management, encourage prompt customer payments with early discounts.

Set reasonable credit limits

Be careful not to throw good credit after bad. Set a strict policy about delinquent accounts, and pay attention to any failure to collect payment.

Outstanding receivables can be a sign of cash flow issues, signaling credit risks.

Automatically send invoice reminders

One of the easiest ways to reduce late payments and collect payments on time is to automate your billing process. The simple act of automating your payment reminders can help improve your cash flow and avoid the last resort of a collection agency or lawsuit.

Track your accounts receivable metrics

Today's savvy CFOs track accounts receivable metrics like accounts receivable turnover ratio, days sales outstanding (DSO), average accounts days delinquent, and more.

Run a daily accounts receivable aging report

The age of overdue receivables is one of the simplest receivable management metrics to keep up with. Simply track payment status and create a daily report that shows all overdue invoices by age of the outstanding debts.

That simple report will help you see exactly where you need to focus your collection efforts, as well as any customer relationships that require special attention—not to mention any looming cash management issues.

Partner with a collections agency

Finally, consider a collections agency to help your company maintain a healthy cash flow despite those past due invoices.

Collections agencies can help reduce cash flow problems by buying your debt outright (for pennies on the dollar) or by charging for services provided, such as setting up payment plans for your customers who want to pay but find themselves in financial distress.

Streamline AR collections with BILL Accounts Receivable

If you want to save time on your accounts receivables, improve your company's cash flow, and get paid faster for services provided, AR automation can help.

1. BILL digitizes the entire AR process—electronic invoices are delivered digitally and immediately, even when you're on the go.
2. Automatically generate your invoices, credit memos, emails, and timely reminders from built-in dynamic templates you can easily configure.
3. Select your items and quantities, and your invoice is ready to go—no more formatting Word documents! Your invoices are based on a list of goods, services, descriptions, and prices that you create in advance, so your invoiced items are always presented consistently, saving time if customers have questions later.
4. BILL enables digital business payments so you can get paid faster, and your clients can set up scheduled payment, including automatic recurring payments, saving you both time and effort while reducing non-payment and improving customer relationships.
5. BILL makes it easy and affordable to accept payments via credit card, as well as offering other options like secure ACH payments from your customer’s bank, without either of you having to exchange bank account information.

Learn how BILL Accounts Receivable can streamline your accounts receivable collections.