What is an accounts receivable department, and how to develop one
Updated: Sep 1, 2022
The receivables department is crucial for any business but can also be troublesome. When a customer doesn't pay their invoice on time, it creates what's called an overdue receivable. Overdue receivables can negatively impact your business in several ways. First, they tie up your cash that could be used for other purposes. Second, they can damage your relationships with customers if not appropriately managed.
That's why it's so important to have a good Accounts Receivable process in place. This post will give you a beginner's guide to - Accounts Receivable, including what it is, how to develop and maintain a successful AR department, and tips for creating a credit approval process.
What is Accounts Receivable?
Accounts Receivable, also known as "AR," refers to the money your customers owe you for goods or services they've received. When you offer customers credit, you're essentially giving them a loan. And like any loan, the customer is responsible for repaying that debt.
Accounts Receivable is an essential part of cash flow management because it's money that your business is owed.
The first step in Accounts Receivable is credit approval. You'll need to establish a credit check system to check each customer's credit before extending credit. This will help ensure that you're extending credit to customers who will likely pay you back.
Your credit policy should outline how you determine who gets approved for credit and on what terms.
How long your customer has been with your business. New customers may be offered shorter terms for payment, while older customers may be provided longer terms.
Payment history. Consider being more flexible with customers who have always paid on time if they ask you to extend a payment period.
How much credit they're requesting. If a customer asks for terms that are significantly longer than what they've had in the past, that may be a red flag.
Credit check. Get a sense of your customer's financial stability by running a credit check. A credit check will give you information about their payment history and any outstanding debts they may have.
Credit and payment terms
Once you've established your credit approval terms, you can set up your payment terms.
Your payment terms should be specific and should include the following:
Set your maximum credit limits.
Set your invoice and payment period (net 30, 60, etc.).
Determine whether you offer early payment discounts.
Late payment penalties.
Are your clients responsible for collection debt and attorney fees?
How much interest will you add to late payments, if any?
Any other conditions specific to your business.
Debt collection terms.
After setting up your payment terms, you'll need to send out invoices to customers. Your invoices should be clear and concise and include all of the information your customer will need to make a payment.
Include your payment terms on all invoices, and send them out promptly.
A customer who is late with their payment must be dealt with immediately. First, try contacting the customer directly to discuss the situation. If that doesn't work, you may need to hire a collections agency to help you get your money. More on hiring a professional debt collection agency
Personnel and responsibilities for accounts receivable
Indicate the different roles of the department, who reports to whom, and what each person is responsible for.
Some of the roles you will want to define include:
Accounts receivable clerk.
Delegate the following tasks to the appropriate personnel
Prepare invoices in accordance with company policies.
Sends invoices to customers.
Prepares, verifies, posts and records customer payments.
Updates customer records, including name and address changes, mergers, and mailing addresses.
Identifies delinquent accounts by reviewing files.
Drafts correspondence for standard past-due accounts collections.
Generates reports about the status of customer accounts as needed.
Researches customer discrepancies and past-due amounts.
Collaborates with the Collections Manager to reconcile accounts receivable periodically.
Assists Accounting Manager in reconciling revenue.
Relays changes of information to appropriate employees.
Performs other related duties as assigned.
Delegates delinquent accounts to the company's debt collection agency.
Maintains contact with the collection agency as needed.