Collecting payments for goods and services sold by your business to its customers is fundamental to profitability and growth, and failure to properly collect compromises the business financially. When your company provides goods and/or services to customers on credit, an account receivable is made.
Accounts receivable (AR), is the amount of money you're owed by your clients and customers. ARs are often considered current assets on the balance sheet since they're expected to convert to cash within a relatively short period, and they're generally crucial in maintaining cash flow in a business.
Needless to say, the efficient management of ARs ensures that your business has sufficient cash to fund its operations and invest in growth opportunities. However, AR isn't just about collecting payments; it's also about assessing the creditworthiness of your customers and managing the risks associated with bad debt. In this guide, we'll discuss how to maximize cash flow through NetSuite Accounts Receivable automation.
ARs refer to the money owed by clients and customers, and it's often recorded as current assets, even if the money hasn't come into the company's possession.
Since they're regarded as valuable assets to be converted into bankable cash, ARs play an important role in cash flow management, which further underscores the importance of maintaining an accurate record of ARs as one of the factors associated with keeping the company in good financial health.
Business owners, credit issuers, and potential investors all look closely at accounts receivables when making financial decisions, which underscores the importance of keeping an accurate record of ARs.
That's where the NetSuite Accounts Receivable functionality comes in, as it enables businesses to generate and send invoices, define credit terms, and manage collections quickly and with ease, gaining the liquidity necessary to drive further growth.
The feature also allows you to optimize accounts receivables, shorten the credit-to-cash cycle, and seize any new investment opportunities when they arise. This is all done thanks to real-time status updates, visibility, and transparency throughout the entire AR process, allowing finance teams to check the status of ARs at any time from anywhere.
This includes viewing the ARs at a macro level for a complete overview, insights into individual customers and their credit, as well as individual invoices issued to various customers.
The accounts receivable (AR) process is a critical component of a company's financial operations, ensuring that businesses receive payment for goods or services provided on credit.
The process for managing ARs typically involves several steps, from the initial sale to the final collection of payments within a specified timeframe. The process begins with credit approval and sales orders, followed by the delivery of goods and services.
This is followed by invoice generation and delivery, which details the amount due, payment terms, due date, and payment methods. Following the invoice delivery, your financial department records the invoice amount as account receivable, which increases the AR balance on the balance sheet.
Regular monitoring and tracking of receivables are crucial for your business. When a client or a customer makes a payment, and the payment matches the corresponding invoice, it reduces the AR balance on the balance sheet and updates the cash balance. However, if the client doesn't pay, your business initiates collection.
The manual management of ARs can be tedious, time-consuming, and prone to human error, which makes analysis and optimization of your process more difficult. However, automating your AR process alleviates many of those issues, as it allows for the automation of nearly every step of the process.
For example, NetSuite allows you to automatically convert sales orders to invoices once those orders are fulfilled and deliver billing statements by mail or email. It also calculates VAT, sales, and other taxes and automatically updates transactions to the general ledger, saving time and eliminating the need for error-prone manual data entry.
NetSuite also allows your business to consolidate multiple orders into a single billing period and a unified invoice, which significantly streamlines the entire invoicing process and provides the customers with the convenience of only having to pay once.
Automation of AR management often leads to improved cash flow and operational efficiency by significantly reducing days sales outstanding (DSO), a financial metric that measures the average number of days it takes for a business to collect payments on ARs.
Reducing the DSO matters because it indicates that the company is collecting its receivables quickly and more effectively, thus accelerating cash inflows and providing the business with more liquidity to cover operational costs, reduce debt, or invest in a new project.
The automatic generation and delivery of invoices reduces the time between the delivery of goods or services and billing, which shortens the overall collection cycle. Automation also minimizes human errors in the invoicing process, such as incorrect amounts, leading to less correction and disputes, which also impacts the collection cycle positively.
Additionally, dunning automation sends automated payment reminders and follow-ups, enhances customer and client communications by offering transparency in their invoices, and has the ability to integrate well with various payment methods, which speeds up the payment process, reduces the DSO, and positively impacts the cash flow of your business.
Lastly, automating ARs using NetSuite grants businesses real-time data and analytics, which helps monitor DSO metrics to identify trends or issues. This feature allows businesses to better optimize their accounts receivable processes, which positively affects cash flow while reducing DSO.
The accounts receivable turnover ratio assesses how efficiently a company manages its receivables by comparing net credit sales to average accounts receivable over a specific period. This metric indicates the effectiveness of credit extension and collection efforts.
A high turnover ratio implies effective receivables management, either through conservative credit practices or proactive collection strategies. Conversely, a low ratio may signal lax credit policies or challenges in collecting payments.
Supplemented by an allowance for doubtful accounts, this ratio aids in forecasting cash flow by estimating the portion of receivables likely to remain unpaid. It offers insights into financial stability and collection efficiency.
Monitoring the turnover ratio provides clarity on financial health, optimizes cash flow, and supports informed decision-making. By upholding effective invoicing and accounting practices, businesses can foster transparency and sustain growth.
| Feature | Accounts Receivable (AR) | Accounts Payable (AP) |
| Definition | Money owed to a company by its customers for goods or services delivered on credit. | Money a company owes to its suppliers for goods or services received. |
| Balance Sheet Classification | Asset | Liability |
| Process | An invoice is issued when goods or services are provided, and the amount is recorded as AR until payment is received. | An invoice is received from a supplier, and the amount is recorded as AP until payment is made. |
| Impact on Cash Flow | Represents incoming funds | Represents outgoing funds |
| Management Focus | Accelerating cash inflows | Controlling cash outflows efficiently |
| Example | Issuing a $10,000 invoice to a customer, recorded as AR and cleared once paid. | Receiving a $5,000 invoice from a vendor, recorded as AP and cleared once paid. |
| Importance | Ensures timely cash flow to meet operational expenses and invest in growth. | Maintains good supplier relationships, avoids late payment penalties, and optimizes cash flow. |
| Tools for Management | Versapay or ScaleNorth’s Dunning for NetSuite SuiteApp for streamlining AR and automating the collections process. | AvidXchange or Tipalti for streamlining AP, with features like automation of receivables and seamless NetSuite integration. |
| Cost Efficiency | Automating receivables can cut costs by over 50%. | Enhanced by tools like AvidXchange or Tipalti significantly reduce the overhead involved with AP. |
| Overall Financial Health | Effective AR management is vital for maintaining financial health and ensuring smooth business operations. | Effective AP management is equally vital for optimizing cash flow and ensuring smooth business operations. |
NetSuite cloud-based software solutions provide businesses and organizations with numerous benefits that allow them to better manage their account receivables, increasing their efficiency, minimizing their losses, and driving up profits and growth, among many other benefits NetSuite provides.
If you're interested in upgrading your financial operations by automating your accounting and your account receivable processes through the use of a comprehensive enterprise resource planning solution, don't hesitate to contact ScaleNorth.
