What Is Accounts Receivable Department and How to Streamline It?

Introduction

The accounts receivable (AR) department is crucial to any company’s financial health. Simply put, it ensures the business gets paid for its products or services. Without a well-functioning accounts receivable team, even the best sales can turn into missed opportunities.

AR professionals are tasked with managing invoices, tracking payments, and collecting outstanding debts – while maintaining positive relationships with customers. Their efforts help maintain cash flow, which is the lifeblood of any organization.

In this blog, we’ll dive into the key roles and responsibilities of the accounts receivable department and how to streamline it. Let’s get started.

What Is Accounts Receivable Department

The accounts receivable (AR) department is responsible for all cash inflows. They track invoice payments and manage collections, cash applications, deductions, and credit risk. Additionally, the AR department ensures that your sales revenue translates into cash and resolves disputes raised by customers on time.

The main purpose of the accounts receivable department is to maximize cash inflows while reducing costs and maintaining good customer relationships. They streamline customer payments by staying on top of their AR metrics, improving collections strategies, and ensuring operational efficiency.

What Are The Functions of an Accounts Receivable Department?

The accounts receivable department within an organization ensures that all payments due to the business are received on time and processed promptly. They also extend trade credit to customers, keep records of those with past dues, and enable collections and cash posting.

Additionally, the AR department reconciles customer accounts and prepares aging reports to determine which customers are behind in making payments. For this, they use data to predict which customers will likely default on payments and help build cash flow forecast models. The department also:

• Work closely with sales and finance departments to verify payments, resolve invoice discrepancies, validate deductions, and record transactions.
• Focuses on higher value-added functions and prioritizes worklists for AR analysts.
• Ensures seamless customer service across all customer touchpoints when sending payment reminders and follow-ups.

Why Is the AR Department Crucial for Business Success

The accounts receivable department is critical to ensuring that the business receives the money as soon as goods are delivered, thereby maintaining a solid cash inflow. To achieve steady cash flows and revenues, businesses need credit policies and collection strategies that favor customers and benefit the business with speedy collections.

To achieve this, the AR department set clear and relevant AR processes and goals to reduce outstanding balances and risks of bad debts. In addition, they will also:

• Set clear goals and objectives to reduce past dues and aging collections.
• Evaluate creditworthiness and set accurate credit limits for customers.
• Timely follow-up with customers and ensure an open and transparent communication.

Accounts Receivable Department Structure

The accounts receivable department structure differs from company to company. In smaller companies, all the functions can be handled by one person, but for a larger business, a typical AR Department can be structured around functions like chief accountants, AR and AP officers, etc.

Small business AR department structure

This will include basic AR roles

1. Accounts Payable (AP) Officer is responsible for managing the accounts payable for the company. They reconcile supplier statements and verify whether the purchase orders are available or not.
2. Accounts Receivable (AR) Officer is responsible for managing the organization’s debtors and accounts receivables. They invoice customers and follow up on payments.
3. Assistant Accountants generally look after petty cash deposits and check collections, as well as processing other journal entries.

Mid-sized business AR department structure

Along with AR and AP officers, a mid-sized AR department structure will include:

1. The Chief Accountant has many duties and responsibilities, mainly involving managing his accounting team and generating financial statements.
2. Management Accountants are risk managers, budgeters, strategists, and decision-makers. They do the work that helps the company’s owner, manager, or board of directors make better decisions.
3. Payroll & Fixed Asset Accountants look after the processing of the organization’s payroll, paying taxes on salaries, deductions for pensions, and social security subscriptions.

Enterprise AR department structure

Along with all the other roles, it will also include a CFO. The Chief Financial Officer (CFO) is responsible for financial planning, record-keeping, and financial reporting to other stakeholders. He/she is also referred to as the right hand of the CEO.

What Are the Key Responsibilities of the AR Department? 

The main responsibilities of an accounts receivable department are to retrieve cash owed by customers to the business by sending payment reminders through dunning letters, issuing invoices on time, supervising credit policies, reconciling accounts, and fostering strong customer relationships.

• Issue and manage invoice
  Once your sales team closes a purchase and delivers the goods, the AR department will need to issue the invoices to the customers. The invoice should be detailed and clear and must include information like:
  
  The invoice number and date
  Date of goods being sold
  Contact details
  Customer details
  Goods listed on different lines
  Cost of goods sold per unit
  Tax or surcharges applicable
  Total amount
  Currency
  
  One of the best ways to streamline invoice management is to use software like electronic invoice payment and presentment (EIPP). It will help your AR team automate sending invoices and account statements to customers while giving your team a centralized hub for both the department and customer to track invoice activities, make payments, and resolve all invoice issues directly.
  
• Assessing Customers for Credit Eligibility
  It is common for B2B businesses to issue trade credit, which means, they will provide goods or services to their customers, allowing the latter to pay later. This practice helps ensure good customer relationships and better sales negotiations. However, this approach comes with numerous risks relating to a customer’s creditworthiness. This makes it critical for the accounts receivable department to gather all relevant historical data from various sources and make informed decisions before allowing credit.
  Using automated solutions like Credit Cloud can make your department’s life easy when lending credit. These solutions offer features like integration with many credit agencies that will automatically pull data regarding the customer, evaluate the agency ratings, and leverage the insights to decide the credit limit. You can also use credit review and decision features that give you pre-built algorithms to add new and existing customers, automate approvals for low-risk customers, set credit limits in no time, and ensure accurate and relevant credit limits for each customer based on the suggestions and credit score by the system.
  
• Ensuring alignment of payments with open invoices
  In addition to issuing invoices, the AR department will track payments and verify if the business has received payments for those invoices. It means your AR department must carefully and diligently record all the open invoices and apply for payments against the respective invoices. This will help them ensure a comprehensive view of the business’s cash flows and collections. ‍
  Your team can use features like remittance auto-matching that automatically links electronic payments and remittances and matches them to invoices. The numerous pre-built algorithms available in the application will compare the remittances with the invoices in the ERP and link these remittances to payments through parameters like customer, invoice number, payment amount, etc. And the cherry on top is that it will conduct the auto-matching process even when invoices don’t have a number.
  
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• Fast-tracking collections for unpaid invoices
  Despite your best collection strategies up your sleeve, you will always have customers failing to pay their invoices on time. Your accounts receivable department is responsible for tracking all unpaid invoices by monitoring the accounts payable portal and updating the status of your records. They should also send payment reminders at regular intervals through emails, phone calls, and other correspondences.
  One of the best ways to deal with unpaid invoices is to have a collection cloud in place and do all the critical yet manual tasks for your team. It will help your AR department prioritize worklists so they can focus on high-priority customers. The solution will also offer numerous email templates to send collection reminders, track customer behavior and invoice status on the AP portal, keep note of all the customer interactions, promise-to-pay agreements, resolve disputes, and increase your team’s outreach by 30%.
  
• Accurate and relevant reporting
  The accounts receivable department deals with a vast amount of data. The team has to ensure that these numbers and insights are systematically and accurately recorded and comply with all regulatory requirements. They collaborate with the finance team to ensure that revenues, outstanding balances, and accounts receivable amounts in the balance sheet reflect all amounts accurately and that there are no anomalies.
  Features like automated analytics can help them create clean data sets and share them seamlessly across the department and organization. Additionally, they will get out-of-the-box reports for all major accounts receivable functions to track business health.
  

Goals of the Accounts Receivable Department

The goals for the accounts receivable department include:

• Maximizing payment recovery for services or goods
• Vigilant tracking of overdue payments and mitigating bad debts
• Streamlined invoicing for clarity and transparency
• Diligent dunning and collections management
• Elevating the customer payment experience

1) Maximizing payment recovery for services or goods

Efficient AR management aims to optimize the recovery of payments for the services or goods provided. The primary objective is to minimize the days it takes to collect payments (Day Sales Outstanding) and reduce processing costs while simultaneously nurturing positive customer relations.

This involves implementing strategies and technologies that streamline the payment collection process, ensuring a steady cash flow for the business while maintaining customer satisfaction.

2) Vigilant tracking of overdue payments and mitigating bad debts

The AR team is pivotal in monitoring and managing overdue payments to safeguard against bad debts. This entails assessing and minimizing credit risk, promptly identifying delinquent accounts, and taking proactive steps to collect outstanding invoices.

By efficiently tracking and addressing overdue payments, the AR department contributes to the overall financial health of the organization and ensures that revenue streams remain intact.

3) Streamlined invoicing for clarity and transparency

The AR department’s fundamental responsibility is invoicing. They are tasked with creating and delivering invoices to buyers for the goods or services they’ve requested. These invoices are comprehensive financial documents containing essential details such as the cost of products or services, itemized tax calculations, delivery dates, and more.

Clear, accurate, and transparent invoicing practices facilitate smoother transactions, foster trust between the business and its customers, and contribute to improved cash flow management.

4) Diligent dunning and collections management

Dunning and collections are integral functions of the AR department, ensuring that outstanding debts are recovered effectively. This process involves collaborating with sales departments to gather customer and financial information, communicating with customers via phone or email to address payment issues, and establishing suitable repayment schedules.

By using a systematic and customer-focused approach, the AR department can significantly reduce the risk of delinquency and improve the timely collection of outstanding balances.

5) Elevating the customer payment experience

A paramount goal of the accounts receivable department is to enhance the overall payment experience for customers and manage extended payment terms. Achieving this objective involves the strategic implementation of technologies and approaches that streamline payments, ensuring they are convenient, transparent, and devoid of hassles.

How to Streamline Your Accounts Receivable Department?

Modernizing your accounts receivable department is essential for enhancing efficiency and productivity, ensuring a superior customer experience, and sustaining robust working capital levels. Here are some strategies for the AR department to streamline their AR operations.

1) Offer multiple payment options

While many companies still rely on paper checks for transactions, there is a clear trend toward increasing adoption of e-payment options for B2B transactions. Offering online payment methods such as ACH, wire transfers, and debit and credit cards is essential for providing a positive customer experience and modernizing AR departments.

In fact, incorporating checks and paper invoices into electronic workflows makes your digital transformation efforts redundant.

2) Embrace electronic invoicing

Streamlining accounts receivable processes often begins with the invoice. An invoice is a document sent to a customer to describe the products or services they’ve purchased, the cost of those products or services, and the due date for payment.

Each invoice is uniquely numbered, enabling the AR department to match receipts and payments with the correct customer. Adopting AI-based E-Invoicing improves trackability and enhances data management.

3) Document your standard operating procedures

An effective way to optimize the process is to document standard operating procedures, also known as SOPs. This approach reduces billing errors and streamlines the onboarding process for new hires in the accounts receivable department.

4) Incentivize timely payments

A great strategy to encourage customers to pay early is by offering a discount. For example, if the customer pays the invoice 14 days before the due date, a 2% discount on the final invoice can be provided. Conversely, you can implement late fees for delayed payments. Be sure to clearly mention these terms and conditions in the payment guidelines and on the invoice.

5) Track your invoices

This crucial step in the AR cycle is typically performed by an accounts receivable representative (ARO). The ARO’s primary role is to track all payments and notify customers when payments have been received. Large companies avoid this cumbersome process by using automated systems to monitor all billing and invoicing activities.

How Does Automation Improve the Accounts Receivable Department’s Productivity? 

Streamlining your accounts receivable function is critical for managing everyday business operations. Automating AR processes can be your best bet here. According to our survey, nearly one-third of mid-sized businesses in the US are planning to automate invoicing, collections, and cash applications. Additionally, almost half of the businesses have already automated their invoicing function.

• No more time-consuming manual work
  AR automation helps the AR department reduce its repetitive work with AI-driven worklist prioritization. It also identifies higher-priority invoices and collections based on dollar values and gives insights into customer behavior by tracking customer AP portals. With AR automation, the department would no longer need to transcribe each call manually. The suite features automatically note customer interactions and monitor responses for promise-to-pays, queries, invoice issues, etc. In addition, it will automate sending reminders to customers for payments and avoid duplication.
  
• Credit monitoring in real-time
  AR automation can help your AR department track credit risk in real time and get a holistic view of customer portfolios. These automated systems use advanced analytics to obtain real-time credit data to assist the accounts receivable department in evaluating customers’ creditworthiness, identifying risks, and making informed decisions to adjust credit limits.
  
• Adopt proactive strategies for speedy collections
  A reactive approach to collections means that the AR department will take action only when customer payments are overdue. Automated AR solutions help your accounts receivable team shift to proactive approaches, supported by advanced AI algorithms in a collections cloud that systematically identifies the invoices with a high probability of delinquency and helps build effective and relevant strategies for speedy collections.
  

Boost Your AR Department’s Productivity with HighRadius Accounts Receivable Suite

HighRadius offers powerful, cloud-based Accounts Receivable software to automate and streamline financial operations. This comprehensive suite includes Collections Management, Cash Application, Deductions Management, Electronic Invoicing, Credit Cloud, and dotOne Analytics to enhance your team’s efficiency and optimize its workflows.

• HighRadius’ AI-powered collections software helps prioritize worklists for the top 20% of customers and automates collections for 80% of long-tail customers. This results in a 20% reduction in past-due accounts and a 30% increase in collector productivity.
• With AI-driven data capture and matching algorithms, HighRadius achieves 90% automation in same-day cash application, eliminating bank key-in fees entirely and boosting team productivity by 30%.
• HighRadius’ AI-powered deductions management software accelerates deduction research and resolution, enhancing analyst efficiency by 40% and improving net recovery by 30%.
• HighRadius’ AI-based credit solution provides real-time credit visibility and global portfolio management, reducing bad debt by 20% and improving credit application approval time by 90%.
• HighRadius’ AI-powered Electronic Invoicing Solution enhances customer experience with a self-serve portal for buyers and multi-channel invoice delivery, increasing billing analyst productivity by 20%.
• Using HighRadius Analytics, you can make informed decisions with visualized data. Track operational KPIs and enable data-driven decision-making through comprehensive reports and peer benchmarking.

FAQs

1) What is the accounts receivable department?

The accounts receivable department manages invoicing, payment collections, cash applications, deductions, and credit risk. It ensures that your sales translate into cash and resolves disputes on time. The main purpose of the AR department is to maximize cash inflows while reducing costs.

2) What is the role of accounts receivable?

Accounts receivable focuses on managing and tracking customer payments and invoices to streamline cash flows in the business. The role involves:

• Maximizing payment recovery for sales
• Tracking overdues and mitigating bad debts
• Streamlining invoice processing
• Diligent dunning and collections management

3) What are the functions of the AR department?

The primary role of the AR department is to ensure speedy collection, track incoming payments, send invoices on time and improve cash flows, and build stronger customer relationships. They will also maintain and reconcile the AR accounts and generate comprehensive reports for decision making.

4) What is involved in accounts receivable?

Accounts receivable involves managing and tracking payments owed by customers to your business for the goods that have already been delivered. It usually involves:

• Issuing and tracking invoices
• Processing collections
• Communicating with customers
• Sending payment reminders
• Setting credit terms and policies

5) What is the accounts receivable department structure?

Different companies adopt different AR department structures. It can be structured around the following functions:

• Chief Financial Officer (CFO)
• The Chief Accountant
• Management Accountants
• Payroll & Fixed Asset Accountants
• Accounts Payable (AP) Officer
• Accounts Receivable (AR) Officer
• Assistant Accountants

6) What are the responsibilities of the accounts receivable department?

The main responsibilities of an accounts receivable department are to retrieve cash owed by customers to the business by sending payment. Other duties include:

• Building monthly financial statements
• Performing Account Reconciliations
• Generating Invoices and Account Statements
• Managing the Billing System