Understanding The Accounts Receivable Department – Function, Structure & Goals

In the world of sales, the phrase “always be closing” has become a rallying cry, echoing from movie scenes to real-life sales floors around the globe. This aggressive approach highlights the importance of sealing deals, but it leaves out a crucial part of the business process: ensuring those deals result in actual payments. That’s where the accounts receivable department comes into play. 

Often the unsung heroes of finance, the AR team is essential for maintaining a company’s financial health. Their role extends beyond sending invoices; they ensure the revenue promised by sales teams is collected. This involves everything from credit assessments to payment collections and managing cash applications—key activities that keep cash flowing into the business. 

In this article, we will explore the structure, processes, and importance of a well-functioning accounts receivable department. We’ll see how their diligent work not only supports but also drives business growth and profitability, making them a central component of any successful business operation. 

Understanding the Accounts Receivable Department 

The accounts receivable department is a critical segment of any business, handling more than just the inflow of payments—it ensures the lifeblood of a company’s cash flow remains healthy and robust. Tasked with the meticulous job of issuing invoices, tracking payments, and managing any discrepancies that arise, the accounts receivable team is central to the financial wheelwork of a business. 

In many businesses, especially those involving goods, products, or services, transactions don’t always conclude with immediate payment. Here, the role of accounts receivable becomes vital. This department steps in after a sale is made but before the payment is received, managing the outstanding balances owed to the business. Whether dealing with individual customers or large corporate clients, the accounts receivable team ensures that all financial transactions are accounted for and that payments are received on time. 

Beyond just collecting payments, the accounts receivable department plays a significant role in forging strong customer relationships. Through their daily tasks—which include generating invoices, assigning payments to the correct accounts, tracking payment due dates, and conducting account analyses—they not only secure the financial health of the business but also maintain its reputational standing through professional and consistent financial interactions. 

Understanding the accounts receivable department is essential for recognising its impact on a business’s overall success. Through effective management of incoming payments and proactive engagement with customers, the AR department not only boosts revenue but also supports sustainable business growth and operations. 

Functions of Accounts Receivable Department 

Issuing and Managing Invoices 

After a sale is made, it’s the job of the accounts receivable department to step in and issue an invoice. An effective invoice should be clear and detailed, including elements such as a prominent “invoice” label, an invoice number and date, service or sales date, contact details, buyer details, a breakdown of services or goods, cost per unit, applicable taxes, the total amount, and the currency used. 

Assessing Customers for Credit Eligibility 

In many business-to-business (B2B) transactions, companies extend trade credit, allowing other businesses to pay later. While this can foster good business relationships and aid growth, it carries inherent risks. The AR department must assess the creditworthiness of clients before extending credit by running credit reports, checking references, and requesting financial standing reports from the company. 

Matching Payments to Open Invoices 

The accounts receivable team doesn’t just issue invoices; they also track whether payments have been made against them. This involves recording which invoices are still outstanding and applying received payments to the right invoices, a critical task for maintaining accurate accounts and a clear picture of the company’s cash flow. 

Dealing with Unpaid Invoices 

When invoices remain unpaid, the AR department is responsible for taking action. Initial steps typically involve sending email reminders and making phone calls. If these efforts fail, the department may escalate the issue by hiring debt collection agencies. As a last resort, the accounts receivable team may need to write off the amount as bad debt, using either a direct write-off method or an allowance method, depending on the situation. 

Performing Reconciliation 

Regular reconciliation is crucial for maintaining financial health and making informed decisions. The AR department should perform reconciliations by comparing the details in the AR ledger with those in the general ledger, ensuring meticulous accuracy to prevent fraud and resolve discrepancies. 

Meaningful Reporting 

The AR department generates various reports that provide deep insights into the financial status of the company. These reports can range from detailed customer accounts to summaries of payments made and outstanding. Aging reports are particularly valuable, categorising unpaid invoices by how long they have been overdue, which helps prioritise collections and assess credit policies. 

Maintaining Good Relationships with Customers 

Effective management of accounts receivable not only impacts the financial health of a company but also its relationships with customers. Studies, such as one published in the Journal of Retailing and Consumer Services, have shown that careful handling of customer accounts can significantly enhance relationship building and improve sales performance. This makes the AR department a critical player in both financial management and customer relations. 

RELATED BLOG: Explore how a human touch can transform accounts receivable outsourcing and foster better customer relationships. Read our blog: “The Human Touch in Accounts Receivable Outsourcing.” 

Understanding the Accounts Receivable Department Structure 

The accounts receivable department is a crucial component of any business, with its structure varying depending on the size of the company. In smaller firms, a single individual may manage all AR functions, but larger organisations typically have a more complex departmental setup, including: 

1. Chief Financial Officer (CFO): Oversees financial planning, record-keeping, and reporting to stakeholders. The CFO is often seen as the CEO’s primary financial advisor.
2. Chief Accountant: Responsible for leading the accounting team and producing financial statements.
3. Management Accountants: These professionals handle risk management, budgeting, strategic planning, and provide critical data to aid in decision-making for business leaders. 
4. Accounts Receivable Manager: This role involves overseeing the entire accounts receivable operation, making strategic decisions, managing the team, and ensuring efficient revenue collection. They also handle high-level tasks like setting credit and collection policies.
5. Accounts Receivable Clerk or Specialist: Team members in this position manage daily tasks related to collections, such as issuing invoices, recording payments, and maintaining accurate account balances to ensure each customer’s account is correct.
6. Accounts Receivable (AR) Officer: Manages billing and collections for the company’s debtors.
7. Assistant Accountants: Handle petty cash, deposit checks, and process other financial transactions like journal entries.

Objectives of the Accounts Receivable Department 

The accounts receivable department aims to enhance the financial operations of a company through several key goals: 

Maximising Payment Recovery 

The primary focus here is to improve the efficiency of payment collections for goods and services provided. This includes reducing the Days Sales Outstanding (DSO), minimising collection costs, and maintaining healthy customer relationships. The AR department employs strategies and technologies to streamline collections, ensuring robust cash flow and customer satisfaction. 

Monitoring and Managing Overdue Payments 

A critical function of the accounts receivable team is to vigilantly track overdue payments and mitigate potential bad debts. This involves assessing credit risk, swiftly identifying late payers, and actively pursuing overdue invoices. Effective management of these elements helps preserve the company’s financial stability and secure its revenue streams. 

Enhancing Invoicing Practices 

The AR department is responsible for generating clear and detailed invoices that communicate transaction specifics transparently. This clarity in invoicing helps to ensure smooth financial transactions, builds trust with customers, and aids in efficient cash flow management. 

Efficient Collections and Dunning 

Managing collections and the dunning process is vital for recovering owed funds. The accounts receivable team works closely with the sales department to obtain necessary customer information, engages with customers to resolve payment issues, and arranges suitable payment plans. A methodical and empathetic approach to collections helps reduce delinquencies and ensures timely revenue recovery. 

Improving the Customer Payment Experience 

Elevating how customers experience the payment process is another key goal. The AR department strives to make payments as straightforward and trouble-free as possible by integrating user-friendly technologies and clear, concise communication methods, enhancing overall customer satisfaction.  

RELATED CASE STUDY: Learn how QX ProAR enhanced receivables management for a UK healthcare recruiter. Read the case study here. 

What’s the Bottom Line? 

You should now recognise the pivotal role that accounts receivable (AR) plays in keeping your organisation financially healthy. Teaming up with an experienced AR solutions provider can simplify this vital function, allowing you to focus on bigger strategic initiatives. This collaboration not only boosts your day-to-day efficiency but also solidifies your financial base, ensuring smoother and more predictable cash flows. With expert AR support, you can redirect your resources toward growth and innovation, setting your business up for long-term success. 

For nearly twenty years, QX Global Group has been assisting businesses across various industries and regions in enhancing their collections processes. Utilising best practices, deep industry knowledge, and cutting-edge automation, we help refine the entire receivables cycle. This not only boosts customer relations but also reduces operational expenses, driving your business towards greater efficiency and profitability. 

FAQs 

What is the accounts receivable department? 

The account receivable department is a crucial part of a company’s finance or accounting division, responsible for managing and tracking the money owed to the company by its customers following the delivery of goods or services. 

What is the role of accounts receivable? 

The primary role of accounts receivable is to ensure that the company receives payments for the goods and services it provides to its clients, manages outstanding accounts, records incoming payments, and pursues overdue invoices. 

How does optimising the AR department impact my organisation’s financial health? 

Optimising your AR department is a game-changer for maintaining robust financial health. By partnering with a skilled AR solutions provider, you streamline a critical business function within the AR department, freeing up your time to focus on broader strategic goals. This partnership enhances operational efficiency and fortifies your financial foundation, leading to more stable and predictable cash flows. Effective management of the AR department allows you to allocate resources more strategically, fueling innovation and growth that pave the way for sustained success in your industry. 

Originally published May 23, 2022 05:05:56, updated Sep 04 2024

Topics: Accounts Receivable Process, Finance and Accounting Transformation