What is AR Process – A Step-by-step Guide
In a business & resource general ledger, the accounts receivable (AR) balance is the amount the company has given on credit to its customers. It is an asset to the business, hence maintaining the AR balance is very essential.
From the point when a customer applies for credit to the stage where the amount is supposed to be returned to the creditor. Certain important steps need to be followed religiously at any company so that maintaining the account receivables becomes easier. This can either be done by AR outsourcing to an external agency or keeping a track of all receivables yourself. The various steps that you can follow to manage the AR at your company are:
Establishing definite credit practices
A much-needed factor in the accounts receivables process is to maintain a credit check system. This means going through the credit history of your customers and offering credit only to those who are more likely to pay your amount back. This method can also help you determine the credit amount that can be given, the payment period which can be offered, or any discounts that could be valid for the customer. Some factors to consider in this step while checking up on a customer is their history with your business, their payment history, your competition in the credit market, and your company’s cash flow.
Sending customer invoices
Setting up an accurate and convenient format for invoices is necessary for your company and customers. Any communication, including the invoices, can be sent in various media formats at the customers’ convenience. You can even send templates so all the needed information is taken directly without any delay and the terms of payment are specified clearly in the document. Your customers should also have easy access to all invoices and other such information whenever they need it. If you need to follow the process of debt recovery later in the future, these invoices would also help keep track of all communication. Hence, your company should keep a track of all the information sent and received.
Accounting for AR
Your company’s financial statements will reflect your accounts receivables, so make sure to account for all invoices sent, such as the products or services offered to the customer, the debt owed for it, and the date on which the amount needs to be paid. Accounting can be carried out in two major methods, on accrual-basis and cash-basis. In the accrual-basis accounting, when a product is sold, it is considered as the revenue. However, in cash-based accounting, it is revenue only when the company receives the amount for the service or product. There are various advantages to following a smooth and stable accounts receivables process. You can offer credit to trustworthy clients, build brand loyalty, and increase your sales. If things don’t go well and you do not get the account receivables from your customers, you can acquire the services of a 3rd party debt collection agency that can help get the amount back. So make sure to follow a well-planned format for accounts receivables for the benefit of your customers and your business.
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