Tag Archive for: accounts receivable best practices

Our Guide to Year End Closing in Accounting

The end of the year is a stressful time for your accounting team. Year-end closing activities are imperative to making sure that you start 2023 off right. Want to make sure that next year’s accounting goes well? Read our guide! This guide breaks down the best fiscal year-end closing procedures and offers some general accounts receivable best practices! Follow these tips to ensure your accounts receivable is ready for 2023 and beyond!

Why Year End Closing in Accounting Is Important

Year-end closing procedures are crucial because they identify balances and deficits on your records that are carried over into the new fiscal year. This examination lets you create more realistic budgets based on the previous year’s actual spend, since concrete figures are more accurate than estimates.

Our Fiscal Year End Closing Procedures

Send Final Invoices

While excellent communication should be happening internally, good client communication is paramount, which is why sending out regular, consistent invoices is crucial.

Send out your invoices as soon as possible. Sending them out ASAP gives you the best chance to receive December payments before the end of the year. You can’t always blame poor AR on your clients—make sure that your AR processes are simple on the client’s end, and make sure they’re easily executable on the client’s end.

After sending your final invoices, we recommend sending payment reminders to outstanding invoices from earlier in the year. Find your list of outstanding accounts and contact clients who haven’t paid yet. They’re likely closing out their books too, so this is one of the best opportunities to get in touch with them.

Make sure that all contact you make with these clients is cordial. Many business owners make the mistake of following up with outstanding accounts aggressively in the hopes that it’ll spur a response. In reality, all this does is damage your reputation, impact your relationship with the client, and increase the likelihood of you marking down bad debt expenses.

Struggling to Communicate With Outstanding Clients? Communication about outstandings accounts can feel awkward. Have you struggled being assertive without being aggressive?


A Collection Agency Can Help

Run an Aging Report

Another recommendation in year-end closing in accounting is an aging report, which identifies unrecoverable accounts. There are many reasons that an account could be considered unrecoverable, whether it’s from lost contact or an outright refusal to pay.

These accounts going unpaid affects your days sales outstanding (DSO) and restricts your available cash flow. This could be incredibly damaging if you work in a capital-intensive industry. Some businesses need a consistent cash flow to reinvest into new opportunities or simply sustaining opportunities. The importance of keeping a healthy cash flow cannot be overstated—in fact, a U.S. Bank study identified that 82% of small businesses fail because of cash flow issues.

In addition to directly impacting your financial situation, a high DSO could disrupt credit or investment opportunities. Investors may be turned away from your business if they notice you have a high DSO when compared to the rest of the industry.

Calculate Your Accounts Receivable Turnover Ratio and Average Collection Period

Understanding your AR turnover ratio and average collection period is key to getting perspective on your financial situation, making these two calculations one of the most important year-end closing in accounting steps.

The AR turnover ratio identifies how many times in a period that accounts receivable were successfully collected on. Follow this formula to calculate your AR turnover ratio:

AR Turnover Ratio = Net Credit Sales / AR
Compare this year’s ratio to previous years to better understand what direction your business is trending in. A ratio trending closer towards 1.0 indicates that your accounting processes are improving. A downward trending ratio indicates that your collection process is becoming less effective year over year.

A second figure worth calculating is your average collection period. Calculating your average collection period can help you better understand if customers are paying on time, and how long it takes to convert your AR into cash. The average collection period can be calculated with this formula:

Average Collection Period = 365 / AR Turnover Ratio

Again, compare this number to previous years figures. If it’s trending down, we would recommend implementing stricter credit policies or turning to collections.

Send Outstanding Accounts to Collections

After a certain point, it becomes unlikely that you’ll be able to collect on accounts by yourself. While the exact time period before you should send to collections depends on the industry, it becomes less and less likely if your payments are already 30 days overdue.

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Don’t Know When to Send Accounts to Collection? We wrote a blog that can help you understand when you should send an account to a collection agency.


When Should I Send an Account to Collections?

For Easy AR for 2023 and Beyond: Choose Rapid Collections

The right collection agency will do more than just get the job done, though. For a collections agency that will always keep your reputation in mind, turn to Rapid Collections. We protect and collect, so you’ll be able to have an ending balance in accounts receivable you can be satisfied with without worrying about your reputation. Contact us today to simplify your AR for 2023 and beyond.

A Guide to Accounts Receivable Best Practices

Accounting doesn’t have to be a constant challenge. Has your team struggled to stay on top of the accounts receivable process? If so, follow our accounts receivable best practices to stop wrestling with AR and keep payments predictable.

How To Streamline Accounting Processes

Follow this list of accounts receivable best practices to make AR easy:

Establish Clear Guidelines

Does your AR process change depending on the situation or customer? This should never be the case. Shifting practices can quickly lead to inefficient and inaccurate accounting records.

The key to good accounting is standardization. Every part of your process should look the same on a day-to-day basis, with the only thing changing being the account that’s handled. A systematic approach should cover credit terms, invoices, the process of sending invoices, and a method for handling income payments. While creating and enforcing formal guidelines for all of these processes may seem excessive, it’s the foundation of an efficient accounting system.

Create Standard Operating Procedures

Once you’ve developed a logical accounting process, you need to make sure it stays logical going forward. The best way to do this is with standard operating procedures (SOPs) that formally standardize accounts receivable workflows. Documenting your process step by step is critical for two reasons.

The first reason is that it gives your employees a point of reference in case they get stuck. While it may sound unlikely that your team would forget what to do, there are niche accounting processes that aren’t conducted as regularly. A wide gap in these processes is possible, which could lead to employees overlooking crucial steps. The last thing you want is employees stumbling through their work and making critical mistakes. SOPs guarantee that they’ll always know what to do next.

The second reason you need to establish SOPs is because it improves new hire onboarding. In-person training is a key part of onboarding, and keeping this process informal could lead to gaps in best practices. While informal workarounds are acceptable in some industries, there is no room for them in accounting. Rigorous SOPs are the best way to ensure new employees follow accounting procedures.

Have Issues With Your Accounting System?
Are you having issues with your AR systems? We developed a guide that covers common issues and how you can solve them:


Improve My Accounting

Revamp Customer Communication

Customer communication is a critical part of accounts receivable best practices, especially with B2B accounts receivable. Your accounting department needs to maintain a congenial relationship with your clients. One of the best ways to keep customer relationships positive is by revamping your communication.

Payment is a touchy subject. It’s important to regularly remind clients about payments without being aggressive. Consider restructuring how your accounting team interacts with clients. You want to remind them often enough that they don’t forget, but not too often that you seem pushy. The right balance will depend on your industry.

Communicate with your clients to find the right solution. Collaborate with a long-time customer and ask them some of these questions:

  • What kind of payment system would work best for you?
  • Do you find reminders helpful or bothersome?
  • Would you be interested in an early payment incentive?
  • What’s the best way for us to reach you?
  • How often is too often when it comes to us contacting you?

Handle customer communication on a case-by-case basis. We can’t overstate the importance of this accounts receivable best practice.

Incentivize Early Payments

An accounts receivable best practice that’s grown very popular in recent years is the incentive. Payment incentives keep your AR team consistently rolling instead of dealing with an influx of payments at the end of the month. A huge portion of late payments happen because a significant amount of time has passed since the original transaction. Incentives encourage the client to keep the payment in mind because they stand to financially gain from them. Money is a great motivator.

Transition to Electronic Invoicing _

Transition to Electronic Invoicing

Electronic invoicing is another major accounts receivable best practice and what we consider to be the best way forward. There’s massive room for error in accounting systems that are dependent on paper. Not only does paper frequently get lost in transit, but it could easily get mixed up in an office. Electronic invoicing systems avoid this problem while adding their own unique advantages.

Electronic invoicing systems open the door to payment automation, which could be a huge step in streamlining your accounting system. Electronic invoicing can make customer payments automatic, which eliminates any missed payments caused by simple absentmindedness. Payment automation also translates to more consistent payments, which makes your accounting system more predictable. While predictability may be boring in some industries, it’s exactly what you want in accounting.

Start Your Collection Plan

Even with these best practices, there will always be clients who don’t pay. That’s why you need to have an actionable collection plan in place. The right collection plan will be effective without compromising your business’s reputation. If the prospect of handling accounts receivable collections on your own seems intimidating, consider partnering with a collections agency. An agency will have the tools and experience to get your AR back on track.

Turn to Rapid Collections for Accounts Receivable Best Practices

Are you tired of constantly marking down bad debt expenses or dealing with accounts that are months overdue? Partner with a collections agency. Collections agencies are made up of professionals whose primary focus is improving AR processes.

If you’re interested in collections but don’t know what agency to partner with, choose Rapid Collections. We’re a full-service provider, which means that you can lean on our support throughout the entire collections process, even if you need legal representation. Take back control of your AR and call us today.