Debunking AR myths: Accounts receivable explanation

Blog | June 9, 2022

Reading time: 7 min

Accounts receivable is a critical part of any business, but it can be difficult to understand. This article will debunk some common myths about AR in plain English.

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Watch the video to learn more about AR automation software.
Watch the video to learn more about AR automation software.

It's no secret that accounts receivable (AR) is one of the most important (and often misunderstood) aspects of a business. In fact, many companies don't even realize they have an accounts receivable problem until it's too late. It’s no wonder, then, that there are a lot of myths about how AR works and requires an accounts receivable explanation. For example, some believe that it's a complex process or that you have to be an expert to do it properly. Below, we’ll debunk some of the most common AR myths, explain how the process works with an accounts receivable explanation and discuss tips for effectively managing your accounts receivable.

The most common accounts receivable myths explained

1. Accounts receivable is not a bad thing - it's actually a good sign for your business.

Accounts receivable is money customers owe you for goods or services delivered. This means you've completed the sale and provided the product. The only thing left is for the customer to pay you. So, when you have accounts receivable, your business is growing, and you're making sales.

This is good news.

Of course, you need to keep an eye on your accounts receivable and ensure that customers are paying promptly.

But don't worry - if you're staying on top of things, accounts receivable can be a good thing for your business.

the most common accounts receivable myths explained graphic

2. AR is not about debt or collections - it's simply a way to track money owed to your company.

Accounts receivable is the money owed to your company by its customers. This could be in the form of invoicing for products and services that have been provided, or it could be for business expenses that have been incurred on behalf of the customer.

AR represents money owed to your business, therefore, affects potential revenue. However, it is also crucial to managing your accounts receivable (AR) carefully, as uncollected debt can quickly become a burden for your business.

There are several different ways to track and manage your AR, but one of the most popular methods is to use an automated AR management software system. This type of system can help you track who owes you money, how much they owe and when they are due to pay. Automated AR software can also help you automate critical tasks such as sending invoices and reminder emails to focus on other aspects of your business. Using this kind of AR management system can be a valuable tool in helping you take control of your accounts receivable for good.

3. AR doesn't have to be complicated - there are many methods that can help you manage it easily.

If you're running a business, chances are you're dealing with accounts receivable. In short, this is the money that your customers owe you for goods or services you've already provided. And while it may seem like a complicated concept, managing AR doesn’t have to be complicated.

While there are many factors to consider, such as payment terms, invoices and collections, a few simple methods can help you easily manage your accounts receivable. In addition, by implementing best practices, you can ensure that your AR process is efficient and effective.

ways companies collect accounts receivable: invoices, collection letters and legal action

Here are just a few tips to get you started:

  • Keep track of outstanding invoices: This will help you stay on top of payments and collections.
  • Send timely reminders: Don't let invoices fall through the cracks. Instead, send payment reminders promptly to ensure that your customers are keeping up with their payments.
  • Stay organized: Develop a system for tracking payments and invoices. This will help you stay on top of your AR and avoid missed payments.
  • Use an automated AR management software system: Automation can help free you from critical tasks like sending invoices and reminder emails. 

By following these AR best practices, you can take control of your accounts receivable and ensure that your business is getting paid on time. Implementing an effective AR management system can save you time and money, so it's worth finding a solution that works for you.

4. Accounts receivable isn't simply a cost of doing business.

Accounts receivable refers to the outstanding invoices on which a company has yet to collect payment. Though it's considered an operating liability, it's really an asset because it represents money owed to the business. Accounts receivable financing is one way businesses can leverage this asset to get the cash infusion they need to grow. 

Here's how it works:

  1. A business owner applies for financing and provides AR invoices as collateral.
  2. The lender then gives the business a cash advance, which is typically a percentage of the total value of the invoices.
  3. Once the customers pay their invoices, the business repays the lender, plus interest and fees.

AR financing can be an excellent option for businesses that need capital but don't qualify for traditional loans. It's also helpful for companies that have maxed out their credit lines or are looking for an alternative to bank loans.

If you're considering accounts receivable (AR) financing, compare lenders to find your business's best rates and terms.

5. Accounts receivable isn't bad for your business credit score.

Many business owners are concerned about the impact of their accounts receivable on their business credit score. However, there is no need to worry - accounts receivable actually has minimal impact on your score. The main factor determining your score is whether or not you make your payments on time. 

AR only comes into play if you have delinquent accounts (bad debt), which can damage your score. In addition, even if you do have delinquent accounts, you can still take steps to improve your score by paying down your debt and maintaining a good payment history going forward. As long as you stay on top of your payments, you should have no trouble maintaining a solid business credit score.

6. You lose money by waiting for customers to pay their bills.

You're giving your customers an interest-free loan by waiting to get paid. If you're a small business, that can put a  strain on your cash flow. Nearly half of small businesses have struggled with late payments. The good news is that you can do some things to help you get paid on time.

  1. Most importantly, be clear about your payment terms from the start.
  2. Make sure your invoices include all the relevant information, such as when payment is due and any late payment fees that may apply. 
  3. Set up automatic reminders so you don't have to chase down payments yourself.
  4. Finally, consider offering a discount for early payment. This can incentivize your customers to pay their bills on time and help you improve your cash flow.

Finally, consider offering a discount for early payment. This can incentivize your customers to pay their bills on time and help you improve your cash flow.

debunking AR myths and getting paid on time graphic

7. You don't need to be a big business to have an AR portfolio.

Having a solid AR management system in place is critical for businesses of all sizes. When customers don't pay their invoices on time, it can strain the company's cash flow and make it challenging to keep up with day-to-day expenses. Additionally, late payments can damage customer relationships and lead to lost business. That's why it's so important to have a healthy AR balance sheet.

By staying on top of invoices with accounts receivable software and working closely with customers, you can ensure that your business is being paid on time and that your cash flow is healthy. In turn, this will help you maintain strong customer relationships and grow your business.

Download the ultimate guide to digital accounts receivable

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Get top tips and fresh insights that will help you control your cash flow and your daily calendar of AR tasks.

Wrapping up debunking AR myths: accounts receivable explanation

By taking these steps, you can help reduce the time it takes to receive payments from your customers. As a result, you'll be able to manage your cash flow better and keep your business running smoothly. Contact us today to learn more about how you can make the most of your AR by leveraging the power of automation.