Accurately tracking AR and optimizing turnover means more than just keeping a running list of your unpaid invoices. We recommend mapping your process from early customer contact all the way to recording close entries.
Specifically, when we support our clients with AR, we walk them through the following nine steps of the order-to-cash process.
#1: Presales
This is where your sales team lives, but it doesn’t mean it shouldn’t be considered by your finance function. During the sales process, you’ll start the conversation about payment expectations like preferred timeline and payment methods.
Think about including steps in your presales process that support the collectibility of your accounts receivable. Asking if a customer would be open to setting up autopay early helps you minimize AR work, for example. If not, you know it’s time to ask about their preferred payment terms, then plan accordingly.
#2: Contract
The contract you enter into with the customer absolutely has to provide clear information for your billing or AR process. If they’re going to be an autopay customer, establish that as part of your agreement, and make sure payment details get collected early.
If they’re going to require AR, make sure the contract clearly explains:
- What constitutes the fulfilment of your performance obligation (e.g., acceptance criteria, usage metering, how a dispute will be handled if the customer disagrees your obligation has been met)
- Payment terms, including what starts the timer (e.g., delivery of the invoice or service date)
- The cost of the good or service, and triggers for additional costs (e.g., usage thresholds, the adding of optional features)
- Details about late payments (e.g., interest, additional fees)
- What you’ll do in the event of nonpayment (e.g., suspension of service)
- Any taxes you’ll pass through to the customer (e.g., sales, VAT)
Include language that says that any payment obligations survive the termination of the contract. That way, your customer can’t avoid making a final payment to you.
Also, as part of the contract execution process, collect the details you’ll need to provide an invoice. Make sure you know which entity to bill, and which stakeholder(s) should receive the invoice. Figure out how you’ll send invoices, whether that means getting contacts’ email addresses or getting set up in your or the customer’s portal.
#3: Order entry and customer setup
Your company probably has a specific process for getting a new customer up and running. That might mean onboarding them with your tech platform, adding seats for specified people. Or it might mean dialing in shipping logistics if you’ll be sending them tangible goods.
As you’re providing what they need to get started, make sure they’re providing what you need for billing or AR, too.
That starts with the details for their customer record. You need to get all of the following:
- The legal name of the entity you should bill
- The entity’s billing address
- The primary contact for billing, complete with their email and phone number
- The entity’s tax status
- The currency to use for billing
- Their chosen payment method (including details like credit card info if they’ll be on autopay)
Make sure the setup goes both ways from a purchase order (PO) perspective. If the customer needs to match your invoice to their PO, work to get what’s required established. If they need to see specific PO details on your invoice, for example, create a workflow for your finance team or automate that in your AR platform.
#4: Fulfillment and go-live confirmation
Remember, AR starts once your performance obligation has been met. The contract from step #2 should make it clear what constitutes fulfillment. That could be the customer’s receipt of goods or the end of the month for each month’s software subscription.
You need to find a way to get go-live confirmation, meaning the customer agrees that your performance obligation has been met (essentially, your product or service has “gone live”). You might require signature upon delivery or use the activation log for your software to provide the required confirmation.
This piece of the order-to-cash process looks different for every company. One thing never changes, though: it’s critical. Make sure you have a way to confirm that you’ve met your performance obligation or the customer could dispute your invoice and refuse payment.
#5: Invoice generation and delivery
A while ago, this required manual work. Someone needed to type up (or even write out) the invoice, matching to the customer’s PO, contract requirements, or order details. Then, they had to mail, fax, or email it to the customer.
Fortunately, technology has streamlined this piece of the order-to-cash process. Plenty of platforms exist today to automatically generate an invoice upon the receipt of a PO, then route it to the primary billing contact(s) on record.
Better still, sophisticated platforms let you see when the invoice has been viewed. This way, you avoid problems that could otherwise arise if the customer claims they “never saw it.”
As you generate invoices, make sure it’s clear and easy to remit payment. If the customer prefers to pay via credit card, for example, you might send them an invoice that allows them to input their credit card info and pay from within the invoice. Again, today’s AR platforms make this easy.
#6: Collections and dispute management
This is the part that most people think of when they hear the phrase “accounts receivable.”
In an ideal world, this step goes smoothly. Say you send an invoice for $1,000 to a customer with Net 30 terms. This step is easy when they pay you $1,000 within 30 days.
AR challenges arise when the due date gets missed, obviously. But you can also run into a headache if a dispute arises. That means the customer says something about the invoice is incorrect (including that the goods or services weren’t delivered per contract terms).
Strong accounts receivable means staying on top of any blockers that arise. Your team needs to be responsive to disputes and follow up as soon as a deadline gets missed. Being proactive about tackling challenges generally helps you resolve them faster.
With a dispute, you’ll want to review the matter and propose a clear resolution. Agree to it with the customer in writing. Then, stay on top of making sure the invoice gets paid, whether you adjusted it or not.
With delayed payment, start dunning immediately. Reach out consistently to keep payment top-of-mind for the customer. Diligent collections help you keep your turnover ratio high.
#7: Cash receipt and application
Once the customer remits payment, you need to make sure you’re applying it properly. Namely, you want to make sure that in whatever AR system you use, that payment gets attached to the correct invoice, and that invoice then gets marked as paid.
A lot of today’s AR technology automates this for you. If you’re organizing your AR manually, though, this step is critical and warrants the careful attention of your team.
#8: Close entries
Close entries are your company’s way of wrapping this whole thing up. You mark paid invoices as closed, and you reduce the balance on your accounts receivable accordingly. You then reconcile your AR ledger to your general ledger.
If any adjustments were required — maybe because of a dispute or an early payment discount — this is the time to make sure that’s recorded.
Just as importantly, strong close entries give you a way to make sure revenue is recognized in the appropriate period. This circles back to accrual-based accounting, the GAAP requirement. By being thoughtful about your AR close entries, you help your company stay in compliance.
#9: Reporting and metrics
This final step is where the magic happens. When you zoom out and look at your entire order-to-cash process, you get the opportunity to learn, then improve.
Calculate your DSO and turnover ratio. Look at how your current AR processes impact your monthly recurring revenue (MRR). Analyze what’s working and what isn’t in your order-to-cash workflows. This way, you can find opportunities to streamline the steps from when a customer places an order to when their money hits your accounts.
Your reporting and metrics help you spot obstacles, like a finance process causing duplicate invoices or a problem customer that never pays on time. Then, your company can proactively solve them. As with most parts of the AR world, proactivity here is the key to getting paid and getting paid fast.
Founder Takeaway
Refining your order-to-cash process is about more than just cleaning up your accounts receivable; it’s about building a resilient financial foundation that allows your team to focus on strategic growth rather than manual tasks. While establishing these nine steps requires time and focus, you don’t have to build this infrastructure alone.
If you’re looking for a partner to help streamline your accounting, strengthen your reporting, and ensure your finance operations can handle the complexity of your company’s next stage, we’d love to help. Schedule a consultation with Shay CPA to discuss how we can support your finance team’s growth.
Disclaimer:
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