4 min read
Key takeaways
- Accounts receivable represents the funds that your organization is owed for goods or services already provided to customers.
- These receivables are vital current assets on your balance sheet that directly impact your working capital.
- Managing receivables—from invoicing through collection and reporting—requires sophisticated solutions. J.P Morgan’s expertise can help optimize this entire process.
Accounts receivable (AR) directly impacts working capital efficiency and shapes business relationships. These funds, owed by customers for goods and services already provided, represent a critical cash flow component. Strategic AR management drives liquidity, operational effectiveness and customer satisfaction. As a critical component of cash flow, AR represents the funds your business expects to receive from customers for goods or services provided on credit. Understanding and managing accounts receivable is essential for maintaining liquidity, as well as for ensuring operational efficiency and fostering strong customer relationships.
What are accounts receivable?
When goods or services are delivered before payment, the resulting invoiced amounts become accounts receivable. These current assets on your balance sheet serve as a key indicator of its financial health and liquidity, directly impacting your operating cycle.
Why are accounts receivable important?
Strategic AR management drives several business outcomes:
- Cash flow optimization: AR forecasting enables precise working capital management, supporting operations, investment and growth strategies.
- Financial health metrics: Days sales outstanding and other AR indicators provide valuable insights into collection efficiency and potential cash flow challenges. Days sales outstanding is the average number of days that it takes for a company to collect payment after a sale has been made.
- Customer relationship management: Systematic monitoring of credit sales and payment patterns informs customer strategy and terms optimization.
- Operational excellence: AR monitoring reveals opportunities to enhance credit policies and collection processes.
- Access to capital: Strong AR performance and management can help improve financing terms and credit availability.
- Stakeholder confidence: Disciplined AR practices demonstrate financial management proficiency to investors and other business partners.
What are the steps in the AR process?
The AR process consists of these key steps, each contributing to effective cash flow management:
- Credit assessment and approval: Before extending credit, evaluate your customer’s financial stability and payment history. This step helps prevent future collection issues and sets the stage for strong customer relationships.
- Issuing invoices: After delivering goods or services, create and send detailed invoices that clearly outline what was purchased, amount due and payment terms. Clear, timely invoicing accelerates payment cycles and reduces payment disputes.
- Recording transactions: Enter each invoice in your accounting system as accounts receivable. Accurate records help ensure you have a clear picture of expected incoming payments and help track your business’s financial health.
- Monitoring receivables: Track outstanding invoices through aging reports that show how long each payment has been due. This visibility helps you spot payment trends and address potential issues before they can impact cash flow.
- Collecting payment: Follow up systematically on outstanding payments through reminders, calls or payment plan discussions. Consistent, professional collection practices help maintain both cash flow and customer relationships.
- Applying cash: Match incoming payments to their corresponding invoices. This critical step keeps customer accounts accurate and gives you real-time visibility into your business’s cash position.
- Reconciliation and reporting: Compare your AR records with bank statements and generate reports on receivables performance. This analysis helps you identify process improvements and make informed financial decisions.
Understanding payment terms
Payment terms set clear expectations for when and how customers will pay for goods or services. These conditions directly impact your cash flow timing and are a key tool for both financial planning and customer relationship management.
Standard payment windows are often expressed as “Net 30” or “Net 60,” meaning full payment is due within 30 or 60 days. To encourage faster payment, some businesses offer early payment discounts. For example, “2/10, Net 30” means a 2% discount if payment is received within 10 days, while requiring full payment within 30 days. Some businesses use dynamic discounting, adjusting the discount rates throughout the payment window to optimize their cash flow.
Clear payment terms do more than just set deadlines—they help predict cash flow, reduce payment delays and set the foundation for strong customer relationships. Strategic term-setting balances your organization’s cash needs with your customers’ payment capabilities.
Tips for managing accounts receivable
Optimize your receivables management with these strategic approaches:
- Establish clear policies upfront: Define and communicate credit terms early in customer relationships. Clear expectations help prevent delays or misunderstandings and strengthen business relationships.
- Streamline invoicing processes: Send accurate invoices immediately after delivery. Quick, error-free invoicing helps accelerate payment cycles and minimize disputes.
- Optimize payment processing: Fast, accurate payment application shortens DSO and improves customer satisfaction.
- Monitor and manage proactively: Regular account review and timely follow-up prevent collection issues. Build relationships that encourage payment priority through consistent, professional communication.
What is AR automation?
AR automation transforms traditional receivables management using integrated technology. These platforms streamline anything from payment processing to reconciliation, offering digital payment options, cash application and comprehensive financial reporting.
Modern AR automation integrates seamlessly with your enterprise resource planning (ERP) systems, scaling operations while improving accuracy and efficiency. These solutions transform complex receivables processes into streamlined workflows that adapt to your business needs.
We’re here to help
Our significant technology investments deliver enterprise-grade treasury solutions for every stage of your receivables management journey. Work with our cash management consultants to optimize your entire AR process—from invoicing through reconciliation.
JPMorgan Chase Bank, N.A. Member FDIC. Visit jpmorgan.com/commercial-banking/legal-disclaimer for disclosures and disclaimers related to this content.
