Accounts receivable (AR) refers to a company’s legal claims for payment for goods or services that have been delivered but not paid for by the customer. The AR process involves customer onboarding, billing, collections, withholdings, exception management, and cash posting. Invoices are typically issued and sent to the customer for payment within a certain time frame. AR appears as an asset on a balance sheet and is part of the process of charging customers for requested goods or services.
What is Accounts Receivable?
Accounts receivable is a term used to describe a company’s legally enforceable claims for payment for goods or services provided to customers who have not yet paid for them. In other words, these are outstanding invoices that a company has issued to its customers that are yet to be paid. Accounts receivable plays an important role in a company’s financial management as it represents an important asset that can be used to improve a company’s liquidity and cash flow.
How does the Accounts Receivable Process Work?
The accounts receivable process involves a few key steps, including customer onboarding, billing, collections, withholdings, exception management, and eventually, cash posting following payment collection. The process typically begins when a company delivers goods or provides services to a customer and issues an invoice for payment. The invoice specifies the terms of payment, including the due date, the amount due, and any other relevant details.
Once the invoice has been issued, the customer becomes responsible for paying the invoice within the agreed-upon timeframe. If the customer fails to pay the invoice on time, the company will typically follow up with reminders, send collection letters, and possibly implement a collections process, which may involve withholding or stopping further services until payment is received.
What is the Importance of Accounts Receivable?
Accounts receivable is an essential part of a company’s financial management as it allows the company to generate revenue and improve its cash flow. By issuing invoices and collecting payments, a company is able to meet its financial obligations, pay its creditors, and invest in growth opportunities. Having a strong accounts receivable process in place also ensures that a company is able to maintain good relationships with its customers by providing clear and timely billing processes and effective collections management.
In The decision, accounts receivable plays a crucial role in a company’s financial management. It represents an important asset that can be used to improve a company’s liquidity and cash flow, and it ensures that a business can meet its financial obligations and invest in growth opportunities. By understanding the accounts receivable process and implementing effective management strategies, companies can ensure that their financial operations are streamlined and successful.