Accounts receivable best practices

February 21, 2016

Accounts receivable represent another important area in the accounting realm of any organization.†This article provides a list of accounts receivable best practices.

1. A list of accounts receivable best practices

Customer credit approvals. A company should have a clear and concise policy for customer credit approval process.† Exceptions to the policy should not take place without an appropriate authorization.

Customer master data maintenance.† There should be appropriate safeguards in place to ensure customer data is maintained appropriately.† For example, it is important from a cash flow perspective to enter payment terms correctly.† If payment terms are 30 days but the customer master data was updated incorrectly to 60 days, then there will be a delay in receiving payments from this customer.

Use KPIs.† Key performance indicators related to accounts receivable may alarm you about unusual trends in your Accounts Receivable department.† Consider things like this: (a) percent of customers who pay late, (b) how many invoices are overdue, (c) days sales outstanding (DSO) and so forth.† There may be specific metrics applicable to your industry.

Invoicing customers. This is one of the most important aspects in accounts receivable.† Invoices should be generated and send out timely to ensure proper payment.† Any day invoice preparation is delayed customer payments will be delayed as well.† Thatís because customers can start payment terms from the date they receive your invoices even if the invoice is dated earlier than that.† Consider using automation (automatic invoice preparation), invoice electronic submission (e.g., via email or supplier portal).† This also includes invoicing customers at the right time.† Sometimes you may need to wait a week after month end to send an invoice to ensure it arrives in time for the customerís approval process; other times you may need to invoice the customer using billing schedules which are different than regular monthly billing.

Cash application. Having this process designed and working correctly will help with the collection process and tracking KPIs, among other things.† Make sure to apply cash receipts to invoices (and not simply customer accounts) and to correct invoices (and not simply the oldest invoices).† Reconcile cash receipts to the activity in accounts receivable registers on a periodic basis.

Early payment discount.† You may find that offering early payment discounts may accelerate customer payments.† There are a few things to watch out for, though, such as customers who take the discount but donít pay according to the discount terms.

Customer statements.† Prepare and send past due letters and customer statements.

Electronic payment options.† This may shorten the period of time you wait to receive customer payments.† You can include instructions on how to make electronic payments on invoices.† There is no wait time for a paper check to be delivered to you, for you to open mail, and deposit checks into your bank account.

Lockboxes.† This is another way to streamline the process of processing and receiving customer payments.† Customers are instructed to send payments to a lockbox which is serviced by a third party (e.g., bank).† The third party processes the payments on your company behalf and deposits funds in your companyís bank account.

Segregation of duties is key.† For example, donít create a situation where the same person can receive and apply customer payments in the system and write off accounts receivable.† This creates temptation and real opportunity for asset misappropriation.

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