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Accounts Receivable Management Techniques 

   
2019-03-31 
Efficient implementation of accounts receivable practices should include a number of firm-wide steps. By creating a single set of firm-wide guidelines, business owners can establish a framework for the businesses accounts receivable operations, thereby promoting efficient turnover of accounts receivable. This framework, otherwise known as Best Practices, should look into ways to decrease the amount of time it takes to make cash collections. In order to do so, it is critical that business owners establish a set of guidelines that takes into account Customer Qualification, Sales, Invoicing, Cash Receipts and Reconciliation. These five areas of business processes should serve as the bedrock of any businesses accounts receivable department. 

Customer Qualification

Customer Qualification, or the process of determining which customers to accept payments on account from, is the first step in implementing best practices for accounts receivable. Best practices in customer qualification can increase the likelihood of revenue collections, and provide guidance on what kinds of customers businesses have had success with in the past. In order to properly identify prospective customers, businesses must first be able to identify the needs of the consumer. In doing so, businesses can begin to foster a more personal relationship between supplier and consumer. This approach can lead to a sense of connectedness between the business and consumer. Next, businesses must identify whether or not a customer will be able to fulfill their debt obligations. This can reduce the amount of time spent tracking down overdue accounts and increase the number of receivables turned over. 

Sales Methodology

The Sales process of accounts receivable involves the actual transfer of assets in exchange for collectible revenue. Sales processing should be done in an efficient manner, which reduces the amount of time between the completion of the sale and the delivery of the purchased product. By reducing the amount of time between purchase and delivery, accounts receivables departments can improve the customer’s purchasing experience and increase the likelihood of on-time payments. In order to smooth out the sales process, business processes should include systems that implement delivery into the purchase of products. The faster a business is able to deliver the purchase product, the more likely they are to receive on-time payments. 

Effective Invoicing

Invoicing is the process of notifying the buyer of the quantity of an item or items purchased, and the price paid for each item. Best practices for invoicing include sending invoices to clients in a timely manner, presenting them in an easily understandable form and providing accurate, up-to-date information regarding the amount payable for the recent purchase. By providing customers or clients with up-to-date and accurate invoices, businesses can properly collect on the amounts owed. This best practice also allows for clients to have a clearer understanding of how their money was spent. Lastly, it allows for customers to best track their expenditures and match them to their general ledger. 

Current Cash Receipts

Cash receipts is the process of recording the amount of money received from invoices, and writing off accounts receivable. This business process must be done in a way allows the accounts receivable department to accurately track which receivables have and haven't been paid. To implement cash receipts best practices, businesses should implement a system that racks the aging of accounts receivables and provides notices for those receivables that have reached a certain threshold without collection of cash. Additionally, when receivables are paid off, the business process should be able to quickly identify who the cash came from, what invoice it is for, and the amount of the invoice that the cash if paying off. By accurately tracking these three pieces of information, Accounts Receivables departments can optimize their business processes. 

The Reckoning of Reconciliation 

Reconciliation should be the final step for the implementation of best practices in a business accounts receivable department. Reconciliation is the process of matching the amount of unpaid accounts receivables in the receivables detail to the amounts listed in the general ledger. The receivables detail, which keeps track of the age of receivables, their amounts and the customers responsible for them, allows businesses to best track where receivables are due from. The reconciliation process should be done by someone separate from the cash receipts department to ensure that there are proper checks and balances put in place. By segregating duties, businesses can implement best practices to ensure accuracy in the reconciliation and cash receipts process. By tying the information from the receivables detail to the receivables general ledger, businesses can ensure the collection of accounts receivable.    

By: Gerhard Muelheims 

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