How an Accounts Receivable Process Flowchart Helps Improve Business Cash Flow

Cash flow is like the lifeline of a business. Without it, regardless of its size, it will shut down as it will face the challenge of meeting its short-term needs, which keep the business operational. Despite a business having sufficient assets or being a big enterprise, it needs to meet its short-term obligations; otherwise, its growth, reputation, employee morale, and inability to offset immediate bills will be negatively impacted.

To avoid these setbacks, organizations, through their accounting professionals, need to monitor their cash flow. This will involve investigating and addressing cash flow issues as they arise. The firm needs to have preemptive solutions to maintain cash flow and develop a financial strategy to eliminate the lack of proper cash flow. Hence, the accounts receivable process flowchart assists in providing critical components that will facilitate the understanding and management of cash flow through the accounts receivable process.

This article will first analyze an account receivable process flowchart, its components, the advantages an organization derives from it, and how the process improves cash flow for the business.

What is an Accounts Receivable Process Flowchart?

It is a graphic representation of each step associated with managing and collecting outstanding customer payments and B2B payments by an organization. The flowchart outlines the stages involved, such as invoicing, receipt of payment, account reconciliation with the payment methods used, such as credit cards or cash, payment plans, and the follow-up process for overdue accounts.

The management of the accounts receivable process involves identifying bottlenecks, inefficiencies, and areas requiring improvement. This facilitates the development of collection strategies to overcome these issues. It also involves defining the roles and responsibilities of every personnel member in the organization, which in turn facilitates efficient workflow and fast, on-time payments.

A Typical Accounting Receivable Process Involves

Businesses cannot operate on a cash-only basis; most of the payments from customers are made later, and payments can be made after delivery or on a predetermined date. This brings forth the successful accounts receivable aspect of accounting; however, to ensure that the business does not run into debt due to a lack of steady cash flow following late payments, certain precautions need to be undertaken. These accounts receivable processes include

• Gaining credit approval whereby a client's creditworthiness is evaluated before extending credit.
• After which the goods or services are delivered.
• This is followed by invoicing the client based on their order.
• This is followed by the payment processing step. If the payment is made after delivery, it is processed immediately. It can be made in cash or digitally through virtual cards.
• The collection process will involve organizing financial records for overdue payments of the set dates.
• Cash applications are made for the payment received for outstanding invoices.
• The final step involves reporting and analyzing customer payment behavior and history when making payments. This is achieved by tracking the accounts receivable metrics.

Following these steps, the accounting software sets up an account receivable process flowchart, which comprises symbols such as ovals, rectangles, diamonds, and arrows, among many others. Each symbol depicts the various steps of the accounts receivables process. For example, the oval shape represents the start and end of the process, rectangles depict processes, arrows represent direction, and diamond shapes are used to demonstrate decisions.

Advantages of using Flowcharts or Visual Representations

Bottleneck identification

By outlining every step, the accounting team and client can identify areas of inefficiency or delays, helping determine the reason for and how to overcome these inefficiencies.

Offers clarity and understanding

Not everyone can understand the account receivable process, especially if they are not knowledgeable in accounting, as is expected of some stakeholders in the organization. However, flowcharts make complex problems associated with financial statements, such as balance sheets and overdue invoices, easier to understand.

Error reduction

Account receivables process flowcharts help reduce human errors, avoid credit risks, and invoice disputes as the procedures for each step are documented, and payment discrepancies are avoided following the payment tracking process.

Improved efficiency

When the manual workflow process is streamlined, invoice processing and timely payment collection are completed efficiently. Outstanding payments, whether online payments or in cash, can be completed with considerations such as payment discounts being made.

Enhanced communication

The flowcharts clearly outline each party's role and responsibilities, facilitating the internal and external exchange of information regarding payment processing and collection. This not only fosters customer relationships with the company but also enhances collaboration among employees.

Training and onboarding

It is also an effective tool for training new employees by the business owner or the company's human resource department. Visual representations have a greater impact on memory than written or spoken instructions.

Document management

Flowcharts offer documentation for financial reporting and maintaining an audit trail. The flowchart process can identify unpaid invoices and overdue accounts and track incoming payments made with cash or wire transfers. This assists in internal management and represents the company's financial position in the market.

How does an Accounts Receivable Process Flowchart Improve Cash Flow?

It Assists in Identifying Bottlenecks and Delays

Delays cause problems with the account receivables process as they affect cash flow generation for a business owner. It delays operations, negatively affects liquidity, and reduces an organization's ability to grow since they do not have the capital to invest or sufficient money to reinvest back in the business. With a flowchart, a firm can determine what causes these delays and find ways to amend them before they develop into bigger issues, which might lead to the shutdown of operations. Investigations might draw issues with late invoicing or slow and inconsistent collection processes in recovering collection from overdue payments. With this discovery, decisions can be made on how to streamline the issues and increase cash flow.

Assists in Enhancing Invoice Accuracy and Timelines

Any errors associated with the beginning of the accounts receivable process affect the entire process of collecting payment. Considering this, invoicing is a crucial step in ensuring that the accounts receivable process flows smoothly. This involves developing accurate, complete, and timely invoices. This provides an organization with the opportunity to clarify the invoices in case they are disputed, eliminating the need to extend the collection cycle.

Having a flow chart helps in standardizing the invoicing procedure, creating accurate and clear invoices, and making sure that the invoices are sent on business days. This will inevitably lead to an improvement in cash flow, and it will guarantee that proper internal error checks and approvals are undertaken, creating a seamless workflow process. Furthermore, the organization will enhance cooperation with their clients since accurate records will be developed and errors eliminated.

Improves Communication and Coordination

The accounts receivables process involves several departments, especially if it is a big enterprise, not to mention the customers associated with the business. For small organizations, the process, though not complex, might involve a few users. Nevertheless, with communication issues, the accounts receivables process will be impacted regardless of operation size. Thus, it is crucial to have reliable communication channels to facilitate invoicing and payment processes, as it will influence not only client relations but also employee relationships, allowing them to communicate and coordinate effectively, facilitating cash flow.

An accounts receivables process flowchart provides a visual representation of every employee's roles and responsibilities in facilitating cash flow process improvement. It helps employees understand invoicing and payment follow-up procedures and their impact on the organization's ability to meet its obligations.  

Enhances Forecasting and Financial Planning

For an enterprise to plan or forecast future cash flow and expenses, it will need to understand how to structure its time for collecting its receivables. The accounts receivables process assists in creating predictions and forecasting as it looks at cycle sales partners and evaluates contracts to determine the terms of payments and when the payments are expected.

The accounts receivables process flowchart allows an organization to plan future payments and designate budgets for investments, payment settlements, and debt repayments. It also provides the necessary financial records to facilitate decision-making regarding company solvency.

Automating the Accounts Receivable Process

Many businesses in the past relied on traditional processes for managing account receivables. These processes involved manual interventions such as data entry and invoice delivery. However, manual tasks are susceptible to manual errors and delays, are time-consuming, and lack accountability and transparency. Additionally, they led to delayed cash flows for the business, which affected its productivity and growth.

By enabling automation software, which is integrated with the accounts receivable processes, businesses can reduce the manual processes and speed up the accounts receivable process. The automated system can facilitate the generation of accurate invoices and timely invoices, and the invoice generation can be customized for every client depending on their role and convenience. For example, the automation tools can send electronic receipts and accept electronic payments. Additionally, the invoices can be sent out at intervals based on how the orders were delivered, and the collections team responsible for the transactions will be on record, guaranteeing accountability.

Moreover, with the automated system, the organization can send reminders to complete customer payments, the software can generate electronic invoices, and the payment process can be tracked. To facilitate the process for the entire organization, the accounts receivable process flowchart can integrate the automated features into business operations to guarantee the faster generation of invoices and collection of payment, facilitating a healthy cash flow process. This is because the overall collection effectiveness of the process requires the collection effort of several departments and finance teams within the firm.

Prompts Timely Collection and Follow-ups

One of the common challenges associated with a healthy cash flow process is late-paying customers. Most customers claim that forgetfulness on their part is the sole reason for the delay. Thus, having consistency in following up on payments and even establishing payment reminders for upcoming payments can have a big impact when it comes to settling payments. Having a flowchart reduces the Days Sales Outstanding (DSO); this is the average number of days it takes to collect payment after a sale. By integrating this process with the accounts receivable process, the days can be determined, leading to the timely collection of payments.

To facilitate this, a well-designed account receivable process flowchart with a receivable cycle and the organization's follow-up procedures for debts will ensure that overdue payments are settled promptly. A structured follow-up process, which includes sending reminders via emails, texts, or phone calls to the customer, the collection agency, and the receivable team, will ensure that the involved parties are aware of their debts and the time frame required to settle them. Overall, this process will help reduce outstanding balances and improve an organization's cash flow.

Sets Clear Credit Policies and Payment Terms

Before extending goods or services on credit, it is important to ensure that the client is informed of the credit terms/policies and payment term agreements. This includes the credit application process and the credit limits the business is willing to extend. This helps to avoid issues related to default payments or delays. This applies to clients as well as B2B businesses in the case of suppliers.

An accounts receivables process flowchart helps employees visualize the credit approval process, payment terms, collection rates, and follow-up procedures for overdue accounts. This information can then be related to clients providing them with appropriate terms and conditions urging them to make payments. This process allows the organization to manage risks associated with credit management. Further, since customers are required to sign their agreement to the policies, this can be used to offset any disputes and delays in payments, helping in the collection efforts and the payment recovery process.

Helps in Reducing Financial risks and Associated Bad Debts

Bad debts brought about by outstanding account receivables affect an organization's steady cash flow and profitability margins, as represented in the balance sheets and trial balance statements. This further has detrimental effects on the organization's financial stability, affecting future investments and growth. An accounts receivable process flowchart provides organizations with clear thresholds for when accounts should be written off. Additionally, if issues with payment escalate, legal action can be taken, reducing the risk of accumulating bad debt for the business.

A flowchart helps identify problematic customers and alerts the organization to the appropriate time to take action. By using the flowchart's systematic approach to collecting payments, an organization can avoid the risk of bad debt and facilitate cash flow.

How Xenett Facilitates Cash Flow through the Accounts Receivables Process Flowcharts

Offers detailed reports on transactions

Xenett's financial reporting features comprise detailed reports that document different stages of reporting.GL Snapshot provides collective details of all the transactions made by each vendor in the GL snapshot and quickly identifies if there is any inconsistency.

Automated processes

With its automated features, accuracy in generating invoices is guaranteed. This also extends to tracking the transactions and relaying reminders to customers and the collection agency to remit payments. Xenett presents clients with real-time dashboards that lists the progress of their efforts payment collection.

Centralized client portal

Through the client portal, an organization has a friendly user interface where they can communicate with all parties. Additionally, the portal facilitates invoicing, tracks the payment process, and records payment receipts.

Facilitates internal and external communication

Xenett's internal communication features enable open communication between vendors, customers, accounting teams, employees, and business owners.

Conclusion

An accounts receivable process flowchart provides a visual representation of the steps to follow for the accounts receivable process. It allows businesses to identify inefficiencies with their current processes, facilitates communication between the departments handling the accounts, reduces delays in payments, and ultimately minimizes the risks associated with bad debt. With the prompts created by the flowchart, there will be notable improvements such as faster collection of payments, efficiency in cash flow management, and the financial position of the business will improve. Ultimately, it helps an organization maintain liquidity, which eventually leads to the long-term growth of the business. Coincidentally, operations are facilitated easily as the risk of financial insecurity is reduced, good relations with customers are maintained, and the morale of the employees is attained, as negative performance also places a risk on their job security.