If you buy accounts receivable software or services, there are key capabilities that you’ll certainly need. Below is a description of the essentials for accounts receivable followed by the nice-to-have elements.
The accounts receivable ledger, a detailed listing of amounts customers owe, is a key report that any accounts receivable system should be able to produce at least once per month. Each item listed in the ledger should include sufficient identifying information (often the invoice or other reference number, the date of issue, and the amount) for both you and your customer to easily locate it.
You need to be able to update your ledger, adding new invoices and other charges while deducting customer payments received on outstanding invoices. Check to ensure that a payment can be applied against a specific invoice in all circumstances, even if it represents only a partial payment of one invoice or if it pays multiple invoices.
A related report that you’ll need to run is an accounts receivable aged listing. This will list accounts receivable ledger charges in different columns, organized by their date. Typically current charges are in the leftmost column; the next column lists those 31 to 60 days old, followed by 61 to 90 days, then 91 days and older. If the date ranges can be customized to your business’ requirements, all the better. A total should be produced for each column. It’s also handy if the program can show the percentage that each column represents of the total receivables.
This aged accounts receivable listing is typically required every month by your financial lending institution if your receivables are security for a loan. If your accounts receivable system cannot produce this report, it can take hours of work for you to prepare it manually, using the accounts receivable ledger as a source. The older the receivable, the more likely it will become a doubtful account. That’s why many financial institutions will not count older receivables, say those more than 90 days past due, as part of the security for your loan.
The ability to print customer statements at least monthly is another important capability. A customer statement contains much the same detailed item-by-item information as the accounts receivable ledger but for just one specific customer. The statement can then be sent to the customer to serve as a reminder of outstanding obligations.
Another essential tool to help ensure prompt collection of receivables is the capability to generate mail-merge collection letters using criteria you specify. For example, if you grant payment terms of 30 days, you may want to send a mild reminder collection letter if the invoice has not been paid after 45 days. At the 75-day mark, the collection letter should be worded more strongly. A letter after 105 days may threaten legal action in case of continued nonpayment.
More advanced reporting and statistical tracking capabilities, along with flexibility in designing reports, can make your AR program even more powerful. For example, an adjustable form writer/designer can change the layout of customer statements, let you add graphics such as a company logo, and select fonts that match ones on your letterhead. While some AR applications use proprietary form writers that may take a considerable time to learn, others let you use popular applications such as Microsoft Word to design your AR forms.
Collections chores can be a big part of managing AR, depending on the nature of your business and your deadbeats, uh, valued clientele. Look for the ability to charge interest or add service charges on delinquent accounts receivable, which displays on customer statements. You may not have a lot of luck collecting these delinquency charges, but the threat of extra charges may induce some customers to pay up quicker.
You can also strengthen your AR by tracking actions taken during your collection efforts, along with customer responses, including promises to pay. Tracking your collections activity helps in follow-up efforts, when you can remind the delinquent customer that their “check is in the mail” promise from last month didn’t pan out. Some of these collections-based customer interactions are tracked in customer relationship management systems, which may offer a more comprehensive solution to tracking all customer contacts, not only those related to AR.
AR statistics can help determine if receivables are being managed effectively. Some AR applications will not only calculate aging statistics for the current period but will also keep track of them for several months back. Also look for graphs and charts of these historical statistics, which make it easier to see trends at a glance than trying to scan a mass of numbers.
As business moves from paper to electronic communications, look for electronic options in AR applications to become more important. This can include e-mail delivery of customer statements and the ability to import transaction records of electronic payments from customers.