What is accounts receivable collections?

Blog | January 7, 2022

Reading time: 6 min

Accounts receivable, or AR, collections is the process of recovering debts owed to a company. The first step is to identify the debtor and then find a way to contact them and ask for payment. If this fails, collection agencies may be contacted to try and recover the debt. Read on to learn more about the meaning of accounts receivable collections, whether it’s an operating activity, how to manage AR collections, accounts receivable management and more.

What does accounts receivable collection mean?

Accounts receivable are the amounts owed to a business by its customers for goods or services that are not yet paid. “Account Receivable” is an essential balance sheet item for any business. You can think of it as the "sales on account" or the amount of money owed to your business by customers who have yet to make a payment.

diagram showing the buyer as accounts payable owing money to the supplier as accounts receivable

Accounts receivable specialists are responsible for contacting customers who owe money to the company, negotiating payment terms and following up with delinquent customers.

Is collecting accounts receivable an operating activity?

Collecting accounts receivable is a necessary part of any organization. To operate, a company must have some form of cash flow. Accounts receivable collections is a revenue stream for companies that falls under the category of operating activities because it aims to improve the cash flow for a company. AR collections is designed to make more money from its current customers by collecting money they owe now. And most companies try to collect in 30 days or at least 90 days.

When a company collects money from its customers, it becomes easier for that company to pay its debts. However, just because the company has the money doesn't mean it's theirs yet. They must collect the money from their customers to make it an operating activity.

How are these receivables and collections reported? A company's accounting department records accounts receivable and AR collections on its balance sheet. If a company has a receivable, an account receivable is created, and its balance is recorded as an expense while the related revenue is recognized. An account receivable collection is an asset, however, as it represents incoming cash.

How do you manage receivable collections?

Managing receivable collections is a significant and delicate responsibility for any retail or retail-related company. To efficiently collect money from customers, you need to know what your customers want and offer it. The more of their needs you can meet, the better chance they will pay for your product or service.

Though managing AR collections can be a complex process, many business strategies can help ensure your receivables get collected. You can manage receivable collections more efficiently by implementing a few different strategies, such as creating a receivable policy, sending out payment reminders and creating effective invoices. Customer analytics and automated AR solutions offer the best way to track, collect and invoice their customers. These automated processes ensure that invoices are collected promptly, preventing you from being left with uncollected receivables which lead to cash flow issues.

Male Customer service representative answering a call

Is accounts receivable a debt collector?

Accounts receivable is an often misunderstood part of the financial world. It's not always clear what it is or what the negative impacts are. Accounts receivable is not a debt collector and does not involve going after payments but merely collecting payments. AR also helps with invoicing, billing, collections and collaborates with accounts payable to manage all finances.

woman and man looking at a laptop screen in an office setting

How to improve your accounts receivable collections

While collecting on past due invoices is always a priority for most companies, it needs to be done strategically. Ignoring the accounts receivable (AR) process can significantly reduce your cash flow and hurt your company’s bottom line. Improving your accounts receivable collections is not just about getting more money in the bank but also about improving customer relations.

There are many ways in which you can improve your accounts receivable collections including:

Research your cash flow history.

The first step is to look at your cash flow and identify the time period that has the highest percentage of invoices that are beyond their terms. Using this information, you can then determine whether an increase in collection efforts will help you improve your accounts receivable collections and maximize profits.

Optimize your sales process.

One way is by properly managing the sales process and ensuring that your invoices reflect the agreed payment terms and conditions between parties. You can also set up a system that will automatically remind clients of their bills and send reminders for payment options.

Optimize payment options.

A great way to increase payment compliance is to make it easier for customers to pay. You can do this by allowing customers to pay on your website, over the phone or through email invoices.

Offer past-due balance discounts and webinars.

Offer past-due balance discounts to incentivize consumers to pay off their balances early. You can also offer webinars with experts who have studied the effects of debt on people's financial lives to help them better understand how paying off debts can improve their financial situation in the long term. Consider further incentivizing customers by offering them a discount or reward for signing up for a webinar.

Use an automated AR workflow management software/solution.

Automated payments are the best way to increase compliance as paying paper invoices is always a time-consuming process. This is because customers have to find your invoice, write a check, and mail it in. Now with invoice automation software, customers can pay invoices from anywhere. This eliminates the need to wait for the mailman or drive to the bank. Consider an AR workflow management software or adopt an AR automation solution. These will help you track balances and better monitor when customers need to pay their invoices, creating an optimal accounts receivable management system for your business.

Final thoughts on accounts receivable collections

Accounts receivable collections is a crucial component of the business world, and, as a business owner, you’re likely already aware that the most critical factor in your company’s success is its cash flow. Accounts receivable collections management involves collecting balances on invoices. Debt collection agencies can help you manage unpaid invoices through several methods, including phone calls, mailings and legal proceedings.

AR collections are a top priority for small businesses. A business’s ability to manage its AR is a crucial indicator of its financial health. However, several factors can cause an accounts receivable balance to increase exponentially, such as the lack of up-to-date resources or insufficient cash flow.

Gaps in accounts receivable collections can hinder accounts from timely payment and in full. Wondering how you can optimize your accounts receivable collections? Consider automated accounts receivable (AR) services, such as Billtrust, to ensure that your company continues to operate at peak performance!