The ability to effectively manage your account receivables (AR) is a prerequisite for running a successful business. It is unfortunate that many business owners fail to maintain a methodical approach to the problem, as a result of which they suffer.
Accounting processes can be optimized and improved, bringing many benefits to the organization. In addition to promoting marketing, sales, customer service, and overall operations, an organized and efficient AR process will push the company. Thus, it makes sense to put the effort into improving it.
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The Benefits of Optimizing Accounts Receivable
Creating proactive processes for Accounts Receivable can be hard to see in the beginning, and many business owners don't. In addition to drastically improving many business aspects, such strategies can also improve the performance of your employees. The increase in liquidity is due to the prevention of existing capital going to waste. In the long run, an organization benefits from this as it reduces debt, reduces costs, funds growth, and often, outperforms the competition.
It is crucial to start the accounts receivable process as soon as possible if you want your processes to be optimized. In many organizations, accounts receivable are an afterthought because they are so focused on making sales. As part of the early stages of a customer relationship, we need to discuss things like payment terms. An example of taking a proactive approach in the payment process is encouraging a new customer to use electronic payments early on in the process. Before doing anything else, then, commit your company to make accounts receivable a priority as early in the process as possible.
The Most Common AR Pitfalls
Many business owners push accounts receivable to the back burner, but poor AR practices can cause a number of problems for their company. Poor AR practices can cause businesses to lose time, money, and productivity. From extending credit to unqualified customers to failing to follow up on past-due accounts on time, bad AR practices can erode productivity. As a result, they have a ripple effect on virtually every aspect of the company's operations. Even worse, most of these problems are easily avoidable.
Among the other common AR, issues are incorrectly applying and allocating cash payments, failing to pay attention to the accuracy of invoices and bills, and failing to generate and use the reports to point out potential issues. Taking steps to correct these and other missteps at the earliest possible opportunity can have far-reaching effects, even for very successful and profitable companies.
Read More: Accounts Payable vs Accounts Receivable
Improve Accounts Receivable Processing by Optimizing These Five Activities
An organization may hesitate to optimize accounts receivable processes at first. Nonetheless, if you approach the situation methodically, you will be able to make fairly rapid and significant improvements. The following five activities will, when properly optimized, significantly enhance the overall effectiveness of the accounts receivable process within your company and create many other exciting benefits:
Accounts Receivable System Accuracy
Keeping customer data accurate is a crucial part of establishing and managing an effective accounts receivable system. Incorrect addresses, for instance, could cause invoices to be sent to the wrong place, resulting in late payments. Continually auditing customers' accounts is necessary to identify anomalies like unusual or inappropriate payment terms, credit limits, discounts, and so forth. A proper policy should be established for recording information about customers, and controls in place so that no unlicensed individuals are able to access or edit it.
Having A Clear, Concise Credit Approval Process Is Critical
Businesses often fall into harmful credit habits in order to boost sales. Of course, this leads to a vicious cycle that can ultimately be disastrous for a company. Providing credit can be a very good thing, but it must be done in the right way. It should include clear instructions regarding how limits should be evaluated and overridden when account holds should be placed, and how applications should be handled. Regular reviews of the credit approval process should be performed because circumstances change.
Establish an Effective Billing Process
An effective billing and invoicing process require accuracy and efficiency. Errors in pricing, units of measure, and the like can wreak serious havoc. A timely approach should be taken to invoice production and delivery, and the standards should be defined. By automating as much of your billing and invoicing as you can, you will be able to make it more efficient. So, don't hesitate to use technology where possible. You can pinpoint problematic accounts by using exception reports. You might consider setting up a customer portal to take some of the work off of your shoulders while giving customers a sense of autonomy.
Hone the Cash Application Process
Upon arriving, payments must be applied correctly. Those applications should be applied to the correct invoices and to the right customers. Otherwise, if disputes or issues arise later, trying to zero in on the initial problem will be very difficult. You should also apply for payments quickly so that you always know which accounts are current and which are past due. For simplicity, limiting the payment options would be one way to optimize it. Post journal entries promptly and long before cutoff dates. Avoid dumping money into unknown accounts unless you know where the money is intended to go.
Ensure the Collection Process is Optimized
Assuring your accounts receivables are optimized makes it easier to collect payments efficiently and in a timely manner. Having payments applied correctly, for instance, makes it easy to identify which accounts are at risk. It is important to be methodical and consistent in your collection efforts. To ensure that payment plans are in line with the company's goals, a clearly defined process should be put in place. Whenever possible, automated processes are preferred to reduce human error risk.
Is it difficult for you to remain on top of financial management in your organization? Having a team take care of the accounting details is necessary. Our company works with small businesses and entrepreneurs to prepare payrolls, taxes, and cash flow. The team of accountants at Irvine Bookkeeping can help you stay current on all the accounting requirements for your business. Feel free to contact us for more information. Our accounting services can be customized to meet the needs of your company: (949) 545-9980
Source: thebalancesmallbusiness - accounting
If you, as a business owner, see that you cannot handle accounting on your own, consider hiring an accountancy service for contractors to help you with it.
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