Cash is the lifeblood of every business, so it is crucial to ensure positive cash flow. The two integral business aspects affecting an organisation’s cash flow are accounts receivable and accounts payable. Accounts receivable refers to the amount which is yet to be received by an organisation. Businesses provide products or services to customers on a credit basis to attract new customers and expand the existing customer base. Accounts receivable include the money owed from the customers and the collection process. The process of AR includes sending invoices, ensuring they have been paid, chasing payments, and matching payments to invoices.
What is AR?
AR is a type of financial account on your balance sheet. The AR process includes an invoice representing a claim against someone for the goods or services you sold to them. Though accounts receivable hold importance for every type of business, managing credit and shipping orders has become more important with the increasing adoption of e-commerce in the market. And so is the need for good accounts receivables management in e-commerce accounting. While there are many steps you can take to ensure your e-commerce business is successful, not all of them involve having a strong balance sheet and a reliable recording system. An accurate understanding of where your cash flows come from will go a long way toward helping you avoid debt and build a creditworthy company. An e-commerce business owner interested in growing your company and expanding your customer base must ensure an effective AR management.
What is the need for good accounts receivables management?
As the e-commerce business grows and expands, so does the need to have a strong grasp on cash flow and accounts receivable. Without strong financial controls, you cannot expect your company to grow and expand. The best way to ensure that your company has a healthy cash flow is by keeping good records of cash disbursements and receipts. Staying on top of your accounts receivable strengthens your business’s overall cash flow management process.
How does AR affect your e-commerce business?
The term AR is extremely crucial in your e-commerce business because it is the soul of the business’s cash flow. The AR indicates a portion of the revenue which has not been received by the business. Therefore, it is essential to remain consistent with the collection of AR payments from the customers otherwise an e-commerce organisation might face a cash crunch. In more adverse cases, a business might hamper the liquidity of their organisation. With a potential growth in e-commerce businesses, it has become difficult to handle the AR function. When a business grows over a period of time, the AR function becomes more complex. Thus, it might become difficult for an in-house team to handle everything on their own. This is the reason why most of the e-commerce organisations choose to outsource their AR function. With a team of experts fully dedicated towards your business helps to simplify all the complexities of the AR function. The team of experts consists of individuals with strong accounting and bookkeeping background and years of practical experience in respective areas.
The importance of AR in an e-commerce business
A strong cash flow is necessary for a business to remain successful in the long run. Fixing the cash flow issues is next to impossible without the ability to quickly and accurately get to the bottom of cash flow problems. You must track your company’s cash flow to ensure that you are aware of the issues and can correct them quickly and effectively. If cash flow is an issue, it may be the right time to conduct an audit to uncover the exact issues preventing you from meeting your financial obligations. With an effective AR management, e-commerce businesses can ensure that they have sufficient cash to support their business growth and fulfil debt obligations. Choosing an outsourced team to handle your AR and AP is a great alternative.
However, an e-commerce business must follow certain steps to streamline the AR process from their end. An e-commerce business can stay on top of AR by setting the requisite standards and guidelines when collecting payments from their customers. In general, businesses operate on a net 30 basis. The 30 day basis means that the customers are required to pay their dues within 30 days of receiving an invoice. It is the responsibility of the businesses to ensure that their customers are paying on time so that they do not incur losses. In addition, timely payments received from the customers ensures you have enough cash to fund growth and pay back business debts on time.
How to track the AR of an e-commerce business?
When you provide goods or services on credit to your customers, whether online or in-person, it is recorded in your books as an account receivable. At the end of each period, you should calculate the current balance of your AR and compare it to the amount you have in hand. The difference is your cash flow, which is known as cash in hand. The best way to track the AR of your e-commerce business is through a cash-based system. This is because cash is the most accurate and established way to measure and determine the state of your business’s cash flow. A cash-based system eliminates the need for you to have any control or oversight of the financial records of your business. Every transaction recorded in the books of accounts and properly reflected in the cash register leads to lesser chances of mismanagement or human mistakes.
So far, we have highlighted the importance of AR for e-commerce businesses and how they can track the AR of their business. But, how businesses can ensure AR effectiveness? How to improve the AR function of your business? Let us learn about some of the solutions to establish effective AR management:
Robust internal system-
Business owners must create a strong internal system to handle the AR of their organisation. Creating a well-structured process and sticking to it prevents undue delays and confusion. Since it is the seller’s responsibility to send invoices, it is better to set a day in the week to create and send out all invoices. The sooner you invoice your customers, the faster you are likely to be paid. In case of sending reminders for upcoming or defaulted payments, owners can select a particular day to contact the customers.
Clear payment terms
The businesses must be transparent about their payment terms as much as possible. Setting clear and concise payment terms helps reduce confusion and conflict at the time of payment. For instance, details regarding how purchasing on credit works, when to expect an invoice and follow-ups, different credit periods offered by your business, etc., provide a clear understanding of your credit system. With a clear understanding of the credit policies and guidelines, businesses are relieved from the undue stress of last-minute payment hassles.
Similar to the terms and conditions regarding payment, providing detailed and clear invoices is essential. Businesses should avoid sending generic invoices to their customers. It is better to send invoices that present a breakdown of all the products and services provided, the amount for each product or service, the total amount to be received, and the due date for payment. This helps to decrease the chances of undue payment delays and helps to avoid any confusion regarding the payment structure.
Utilising accounting software
The process of creating and sending invoices, confirming their receipt, and following up on payments can be quite difficult. It requires sufficient time and effort on the part of business owners. Thus, considering automation, using accounting software to record and track your AR and AP can be a lifesaver. E-commerce business owners can integrate their website with a variety of accounting software available. As a result, it helps to streamline the entire e-commerce accounting of your e-commerce business.
If your company is serious about being competitive in the fast-paced world of online sales, you must have an accurate understanding of where your accounts receivable are coming from and how you can manage them better. You will need enough credit to meet your obligations when they arrive. If you sell everything through an online platform, then you should assess how important accounts receivables are for your business. Even the smallest inconvenience could cost your business money down the road. Even if you’re only selling physical products online, you should keep track of how many accounts receivables you have and the percentage of total sales. When you experience difficulties getting payment from your customers, it can have a negative impact on your company’s reputation and operations in general. A business without cash flow is like a wagon without a team of horses. Without sufficient cash flow, it will be hard for your e-commerce business to grow. The above-mentioned paragraphs provide a good understanding of AR and its importance for e-commerce businesses. An effective management of accounts receivable will help to protect your e-commerce business against potential threats and keep your business moving forward.