What is Accounts Receivable Management?
Accounts Receivable Management is the work you need to do so that you or your company can get paid. In it’s simplest form AR Management includes:
1. Credit management
3. Posting payments
4. Reconciling accounts
What is Accounts Receivable?
Accounts Receivable are all of your unpaid invoices.
Generally speaking, the faster you can collect your outstanding invoices, the healthier your cash flow, and therefore, your company is.
Unfortunately, for many small businesses, Accounts Receivable Management is last on the agenda, coming in well behind sales and the actual execution of whatever it is you do.
And on the face of it that makes sense, but ignore your Accounts Receivable for too long, and cash flow will suffer, when cash flow suffers, so does everything else.
But I digress – let’s move on to the meat of this article.
Accounts Receivable Management begins with managing your extension of credit, or not, and ends with collecting payment.
Credit Management begins with gathering information about your client or prospective client, typically on a credit application.
Incomplete credit applications are one of my particular pet peeves. Not gathering client contact information is one of the best ways I know of to make sure you’re unable to collect your money. It is stunning to me how many companies, large and small, don’t obtain sufficient contact information. Or, maybe it just seems like a lot of because I end up seeing the ones with collection problems!
In any case, to properly execute the responsibilities of your department, you will need complete contact information. Make sure you have a file on every customer with either a completed credit application or a completed contact information form.
Evaluate Credit Worthiness
Do it! Use the information you gathered on the credit application and check the references, particularly the banking information. Poor payment history is knowable! All you have to do is ask.
Establish Credit Limits
Set credit limits that take into account your companies cash flow requirements and your customer’s ability to pay. Don’t extend more credit than you can afford to lose.
Many, if not most, collection problems start in the billing department. The first time I sat down to list all of the invoicing errors I’d encountered that caused collection problems, I was stunned to find 17 common billing errors! Not stuff that happens once in a while, ubiquitous errors that I’ve seen in companies both large and small. I’ve culled that list down to what I now fondly call “The Dirty Dozen Invoicing Errors That Will Cost Your Money Every Time.” You can download a PDF copy of them here.
Posting payments incorrectly or not at all, causes collection problems. It causes all manner of accounting issues as well. My focus, however, is accounts receivable collections, not bookkeeping, so I will restrict my comments to what I know about, posting payments correctly to avoid collection and reconciliation issues.
Posting Invoices to the Oldest First
Again, this is common practice in both large and small companies and is often the posting method of choice when:
- The customer doesn’t specify which invoice he intends to pay.
- The check doesn’t match any invoice we have on file.
- You have old unpaid invoices and believe they should be paid first.
Don’t do it! Grammarly is asking me if I’d like to be a little more diplomatic about that. That’s a hard NO – don’t do it!
Post your payments the same way your customer does – if you don’t know what they’re doing, and sometimes you won’t, call them or email them and ask. If you can’t reach them, leave it unapplied. That doesn’t mean, don’t enter it, enter it and leave it as a credit on their account until you find out what they intended to pay. Then keep after them until you get the answer you need.
I’ll generally wait to do the data entry, so I only have to do it once, but if there is any chance at all that you won’t follow up, or it takes longer than a day or two to reach them, enter it and apply it later.
Two reasons, when you post to the oldest first instead of to what the customer intended to pay, eventually, you’ll disagree about how much your customer owes, and neither of you will be able to unwind it. You’ll often end up either losing money or losing the customer, neither is necessary.
It’s a poor accounting practice, it seems faster at the moment but will cost you time and money later.
Reconciliation means your records match their records, whomever they may be.
Reconciliations are why we want to enter everything correctly in the first place. Eventually, everything needs to be reconciled, including bank accounts, customer accounts, and vendor accounts.
In accounts receivable, we’re concerned with customer accounts. When our records don’t match our customer’s, we have a dispute and often a collection problem.
The objective of Accounts Receivable Collections is to collect your companies outstanding invoices as close to the due date as possible without damaging your relationship with your customer.
It’s not hard to do, but it takes planning, good record keeping, a consistent and well-executed effort, thick skin, and a good attitude.
The AR Collections process is rife with opportunity for someone to be annoyed. That someone should not be you, and if it is, you need to have someone else do the calls. If it’s the customer, well, you have a problem, and that’s a “whole nuther” discussion.
updated Feb 17, 2020: This is an updated version of an article I wrote in 2011.