What is the accounts receivable process/cycle?

The accounts receivable (AR) process, or the accounts receivable cycle, is the series of actions businesses carry out to collect their accounts receivable. It starts when a customer places an order using credit terms and ends when the supplier business receives the due payment in full.

Accounts receivable refers to money owed to a business by its customers for purchases made on credit. Although the total value of accounts receivable is counted as a current asset, the revenue is only fully realized once the supplier business has actually collected the payment.

The accounts receivable process is there to make sure that these due payments are collected reliably and accurately. It’s an important element of cash flow management, helping suppliers minimize the chance of accounts receivable going overdue or turning into bad debt.

It covers key steps between a sale and the accounts receivable being successfully collected, including the invoicing process. Each step can be optimized to make the accounts receivable process more efficient, fueling a stronger working capital position.

The accounts receivable process: Step-by-step

While the particulars of the accounts receivable process vary from business to business, the following steps outline the key series of events that make it up.

1. Receiving a customer order

The process starts when a new or existing customer places an order and requests a payment using credit terms. This is typically registered from the point that a purchase order is received. This document outlines what goods or services are being ordered, in what quantity, and at what price.

2. Credit approval process

If the customer is new, and the supplier business doesn’t already have existing credit terms, the next step is to establish them. This begins with a check on the customer’s creditworthiness, designed to determine whether they pose a credit risk (i.e. if there’s a risk that they won’t pay on time or at all).

If the credit check is successful, contract negotiations can begin. This process results in a credit arrangement that suits both parties, outlining the number of days the customer has to pay future outstanding invoices.

This step isn’t necessary if the customer is already onboarded and has an existing credit arrangement with the supplier. However, depending on when they last made a purchase using credit, the supplier might decide to carry out an updated credit check to ensure the customer’s situation hasn’t changed dramatically.

3. Invoice creation and dispatch

The next step is for the supplier to create an invoice matching the request for goods or services made in the purchase order and send it to the customer. Generally, the agreed-upon payment terms only begin when the customer receives the invoice. That means sending invoices quickly is a priority for suppliers looking to increase cash flow.

For this reason, it’s increasingly common for suppliers to use electronic invoicing software to handle the invoicing process. This tech solution automatically generates invoices based on purchase orders and sends them directly to the customer via their enterprise resource planning (ERP) software.

It doesn’t just make the process quicker, though. Electronic invoicing also minimizes the time and effort suppliers have to spend creating invoices, and it can reduce the number of invoicing errors made.

4. Consider accounts receivable financing

At this point, the supplier can consider using an accounts receivable financing solution to expedite their cash flow. This method of financing involves the supplier selling their unpaid invoices to a third-party financer, who then takes responsibility for collecting the payment from the customer.

It’s a form of working capital funding, allowing businesses to decrease their days sales outstanding significantly and put capital to use more quickly. They can use the money generated through accounts receivable financing to fuel growth, buy more inventory, or cover day-to-day costs.

This step marks the end of the accounts receivable process for suppliers that use accounts receivable financing.

5. Accounts receivable collections management

The process continues with collections management for businesses that don’t choose to accelerate their due payments with accounts receivable financing. This process can be simple, with customers who have developed a reputation for paying on-time reliably. But, in some cases, it can involve a hands-on approach.

If an invoice goes past due, the team responsible for AR collections is responsible for opening communications with the customer and chasing the payment. Further action, such as involving the legal team and opening a formal dispute, may be required as time progresses. At a certain point, if the payment seems unrecoverable, it may be logged as bad debt.

6. Receipt of payment

In all but outstanding circumstances, the accounts receivable process ends when the customer makes the due payment to the supplier. At this point, the value of the invoice, which was previously recorded under accounts receivable, becomes realized revenue.

The accounts receivable department may have other processes to follow up on the receipt of payment, like carrying out an analysis of their process or recording KPIs.

Automation in the accounts receivable process

Advances in technology have led to an evolution in the way that businesses manage the accounts receivable process. Many companies use specific technology solutions to automate elements of the accounts receivable process, leading to efficiency gains and reductions in the number of errors caused.

Key areas that can be automated, in-part or wholly, by accounts receivable software include:

• Incoming purchase order processing
• Invoice generation and delivery
• Accounts receivable financing
• Collections management and customer communication

The disparity between the efficiency of the traditional accounts receivable process and the modern one is the key driver of the adoption of accounts receivable automation software.

Boosting working capital with AR financing

Along with automating parts of the accounts receivable process, adopting accounts receivable financing is another method of bringing efficiency to a key part of operations.

With a solution like Taulia’s Receivables, you can improve your balance sheet and drive growth by quickly transforming your accounts receivables into cash. The solution also integrates with the wider Taulia platform and ERP environment.