What is accounts receivable?
Accounts receivable is a designation for money that a customer or client has agreed to pay in exchange for a service or product, but that they have not yet provided. Accounts receivable is most common for businesses with high-value products that may require payment plans. Offering payment plans or an extended payment period is a useful strategy with advantages for both the company and the customer.
Most businesses manage their accounts receivable using the following steps:
- Provide an invoice: Once the customer has received the product or service, the accounts receivable department sends an invoice with information like the total amount owed and the payment due date to the customer.
- Record the amount owed: The accounts receivable department records the amount owed by the customer in the company’s accounts receivable tracker or software program.
- Collect the payment: The customer provides payment or, if necessary, the accounts receivable department secures payment with the help of a collections agency.
- Balance the accounts: The accounts receivable department records the date and amount of the payment in their accounts receivable tracker or software to balance the accounts.
Benefits of accounts receivable
Consider the benefits accounts receivable can offer your company:
- Build loyalty: Providing customers the opportunity to pay over time rather than demanding payment upfront can help establish customer loyalty.
- Track credit: With customers who have made a past purchase or past purchases, you can make individualized decisions about the type of payment plan you offer to meet your needs and the needs of the customer.
- Understand profits: Tracking accounts receivable should help your company better understand how much money you actually have in your accounts and how much money you’re owed in outstanding payments.
- Develop organization: Developing an accounts receivable department can help you establish an effective overall financial strategy and organization for your company.
Common terms used in accounts receivable
A few common terms used in the accounts receivable department include:
- Accounts receivable turnover rate: This metric shows how effective the company is at collecting outstanding payments from customers.
- Average collection period: This metric is the average amount of time it takes for the company to actually collect the payment from the customer.
- Current liabilities: This metric expresses the company’s outstanding debts owed to other companies or creditors.
Tips for maximizing accounts receivable payment
Use these tips to help you improve the likelihood of receiving payment from your customers and clients:
- Provide invoices: Ensure your customers know how much they owe for their purchase and when their payment is due by providing accurate and timely invoices.
- Build relationships: Establish a relationship with your customers outside of the accounts receivable department. The more rapport your business has with the customer, the more likely they are to pay their bills on time.
- Give terms: Make sure your customers know the specific terms of their payment contract, understand when payment is due and know the repercussions for not paying on time.
- Use software: Use a software program that makes it easy to send payment reminders to customers, enter payments and thank clients from one place.
- Make payment easy: Give your customers multiple options for making a payment, with at least one online option. The easier it is for the customer to pay, the more likely they are to do it.
- Communicate frequently: Consider sending more than one invoice to customers, particularly as their payment date gets closer. Frequent reminders will help them remember to pay on time.
- Include penalties: Add late payment penalties to the payment contract. Knowing they’ll have to pay more money long term if they miss their payment deadline will entice most customers to pay by the due date.