Accounting for Accounts Receivables: Overcome the Risks

Conducting accounts receivable is a high-stakes process that demands a high degree of concentration for all parties involved. That’s because accounting for accounts receivables literally involves making sure the company is being properly paid for the services it renders. 

Because this task is so important, and demands 100% accuracy, many CFOs are constantly on the lookout for how to reduce the risks associated with accounts receivable. Accounts payable automation software is one potential solution.

Coming Up

What is Accounts Receivable?

How is Accounts Receivable Recorded?

What is Accounts Receivable vs. Accounts Payable

What are the Benefits of Accounts Receivable?

What are the Steps in the Accounts Receivables Process?

What is Accounts Receivables Financing?

What is the Purpose of an Accounts Receivable Aging Report?

What Can Make People Pay Faster?

What Happens if Customers Don’t Pay Up?

The Most Effective Counter-measure for the Risks Associated with Accounting for Accounts Receivables

What is Accounts Receivable?

Accounts receivable, not to be confused with accounts payable, is the process of billing clients and collecting payment for the services your company provides. 

It entails creating detailed billing statements that must accurately represent the client's outstanding balances, and then making sure those balances are collected in full. Every task associated with the accounts receivable process must be conducted accurately, or the company will lose money. 

For example, if billing statements are inaccurate because they overbill a client, you may lose the client when they discover the discrepancy. At a minimum, you will have to pay a refund or issue a service credit for the problem. 

If you fail to collect past due balances in a timely fashion, your cash flow will suffer. Both cases explain why accounts receivable is so important and why it must be an error-proof process. 

How is Accounts Receivable Recorded?

Every company must standardize a comprehensive accounts receivable process that includes record creation and record keeping. Accounts receivable records are recorded as entries in a ledger that lists a client’s debits for services rendered and payments received for those services. 

This ledger should run in a chronological order starting from the company’s first bill for service rendered on behalf of the client and the corresponding payment for each invoice or bill. 

Each company client should have their own independent ledger, and the client payments should be reconciled against the ledger on a predetermined schedule (usually monthly). 

This reconciliation should include all account ledgers for all clients. The reason this reconciliation should be done as frequently as possible is to make sure the company is promptly collecting payment from all its clients, or is taking immediate action to reconcile past due accounts before they are written off as “bad debt”.

What is Accounts Receivable vs. Accounts Payable

Accounts receivable is not to be confused with accounts payable. Although they are both key accounting functions that must be done with complete accuracy, they are at opposite ends of the accounting spectrum. 

Accounts receivable is the process of invoicing clients and getting paid for your company’s services. 

Accounts payable is the process of receiving invoices and paying for the third party services your company uses. For example, if you were a law firm, your accounts receivable department would collect payment from clients, while the accounts payable team would see to it that your suppliers are paid. 

What are the Benefits of Accounts Receivable?

The most tangible benefit of accounts receivable is obvious: a company that doesn’t collect all of the money it is owed is not as profitable as it should be. 

Having an organized, efficient accounts receivables process will allow companies to not only collect their payments in a timely fashion, it will allow the company to have a stable cash flow. 

Once this stable cash flow is established, the company can begin concentrating on how to expand its operations and/or make them more efficient. 

It will also create a solid balance sheet the company can show to potential financiers or business partners as proof of its financial health. It’s not an overstatement to say that no company without a solid accounts receivable team and process in place can consider itself as ‘healthy’ or ‘well-run’.

What are the Steps in the Accounts Receivables Process?

Although every company may have some variance in their specific routines, the broad strokes of the accounts receivables process are as follows. 

1. First, tabulate a current statement of outstanding invoices for all company clients that dates back to the most recent prior statement. 
2. Second, tabulate any payments received during the billing period and match those payments to individual line items in the client ledger. 
3. Third, subtract the balance for paid invoices from the outstanding amount, and then use that information to create  a “current” client billing statement. 
4. Send that statement out to company clients and then finally, note the payments on the client’s ledger as they arrive. 
5. At the end of the billing period, there should also be a process whereby severely delinquent accounts are flagged and reported to upper level management for more direct collection action. 

What is Accounts Receivables Financing?

Accounts receivables financing is a method of borrowing where a company may pledge a percentage of their future accounts receivables balance in exchange for a larger up-front payment from a financing company. 

Companies may choose this option when they are looking to finance a large expenditure such as new office equipment or paying the security deposit for a new space. 

However, companies that wish to access this type of credit must be able to demonstrate they have a history of receiving consistent revenue from clients. This underscores the importance of having the best accounts receivables process possible.

What is the Purpose of an Accounts Receivable Aging Report?

The purpose of an accounts receivables aging report is to provide companies with a full picture of the company’s outstanding bills and delinquent clients for a specific period of time. 

Although aging reports can date all the way back to a company’s founding, the specific delinquencies or outstanding balances listed on the report should be listed in the following categories:

• 30 days or less delinquent 
• 30-59 days delinquent
• 60-89 days delinquent
• 90 days or more past due

Ideally, every client balance would be collected within the first thirty days of the invoice being sent, but that doesn’t always happen. Different clients will have different payment procedures. For example, some clients may pay on a monthly basis, while others pay on a net 30, 60 or 90 day pay schedule. 

Each stage of the aging report should have an increasingly aggressive collection plan involved. In most businesses, debts over 90 days past due are considered as “bad debt” and written off. This doesn’t mean the business stops trying to collect the debt, but the 90 day point is when a business will officially end their relations with the delinquent client and begin taking legal action. 

This could mean “selling” the debt off to a collection agency for a smaller percentage of the past due balance, filing liens against the delinquent debtor, going to court, or all three of these options. 

However, it is rare that companies who resort to these means of debt collection are ever paid the past due balance. So, companies run aging reports to proactively prevent clients from reaching the 90 days past due mark. 

What Can Make People Pay Faster?

There are a lot of proactive steps companies can take to make their clients pay faster. These steps include a combination of carrot and stick measures designed to make the client understand it’s in their best interests to pay faster. Examples of these measures include:

1. Offering discount for on-time payments

The “carrot” approach to making clients pay faster can be surprisingly effective. Giving companies a one or two percent discount on all invoices paid within thirty days of receipt will incentivize their own accounts payable team to pay the bills on time.

2. Offer as many ways to receive payment as possible

In the old days, companies cut manual checks and put them in the mail to pay off their bills. Although many still do that, one way to get payment faster is to make it as easy as possible to pay. This especially includes allowing companies to pay electronically, on-line or directly through some other cloud-based payment facilitator. 

3. Automate your billing process

Adopt an automated method of sending out regular statements to your clients so that they are always aware of their outstanding invoices/balances. By doing this, you are already fulfilling your legal obligation to take reasonable means to collect the debt before resorting to more aggressive collection measures. 

You are also increasing the chances of being paid on time because no accounts payable department can just “ignore” a steady stream of billing statements with increasing balances. 

While keeping an eye on your invoices, you can further streamline your key business processes with SolveXia. SolveXia is a low-code finance automation platform that can be up and running in a matter of hours. With an intuitive user dashboard, you gain a connected overview of all your data and can connect your systems to ensure your key finance functions remain streamlined. 

SolveXia can execute reconciliation, expense analytics, regulatory reporting and more. The software grants data-driven insights for quick decision making, as well as the means to achieve increased internal control so you can stay atop of your critical finance functions. 

More importantly, SolveXia’s software processes information 85 times faster than work done manually while reducing errors by 90%.

4. Include a penalty for late payment

Many companies charge a fixed late fee per unpaid invoice or even a monthly financing charge on invoices more than 30 days past due. This “stick” method of collection is effective because no accounts payable team will want to explain to the CFO why they’re paying late fees on past due invoices. For any company, a late fee is basically wasted money. 

What Happens if Customers Don’t Pay Up?

No matter how effective your accounting procedures for accounts receivables are, it is inevitable that you will eventually encounter clients who simply don’t pay. There could be a number of reasons for this, which range from clients who just have poor accounts payable procedures to companies in financial distress. 

However, the “why” a company is paying late is immaterial if they owe you money. At the end of the day, your job is to get full payment for the services you rendered. You can employ some of the following steps if your customers don’t pay:

1. Create a Collections Team

It pays to have someone on your team who is willing and able to reach out directly to past due clients about unpaid bills. 

However, having a designated collections person (or team) who will reach out directly to clients with the most severe delinquencies and seek to make payment arrangements can prevent many accounts from being written off as bad debt. 

2. Have a “severely delinquent client” contingency plan

The deeper a client gets into debt, the less likely it becomes that they will get themselves out of it. One way to prevent clients, and your own company, from getting in too deep is by creating a contingency plan for how to handle severely delinquent clients. 

This plan should include a series of progressively tough measures designed to encourage clients to normalize their accounts or if necessary, cut services off to a client until their account is brought out of arrears. 

This plan should be spelled out to the client in your terms of service and reiterated to them by your collections representatives. 

3. Find a reputable law firm and collection agency

Legal action is always the last resort for severely delinquent clients, but sometimes it is inevitable. There are law firms in every city that specialize not only in suing for bad debt, but also have internal collection agencies who pursue clients once a judgment or lien is entered. 

Firms that handle the entire process in house will be of much greater use to you than having one law firm to file your legal action, then having to contract with a third-party collection agency to try and enforce your judgment. 

The Most Effective Counter-measure for the Risks Associated with Accounting for Accounts Receivables

The sheer necessity of a 100% accurate accounts receivables process and the probability of human error do not go hand in hand. This is why so many companies rely on accounts payable automation software to handle these key functions. 

If you’d like to learn how an automation solution like SolveXia can simplify your accounting for accounts receivables, reach out and book a free demo today.