Account 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.
That’s 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 customer’s 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 don’t 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 company’s bank
account.
Segregation
of duties is key. For example, don’t 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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