How to Manage Accounts Receivable? A Simple Guide
Accounts receivable (A/R) is money that is owed to you by customers for products and/or services that you have provided. It’s important to stay on top of your customer invoices. If you don’t, it could lead to cash flow issues, which could impact your ability to pay vendor bills, meet payroll or other obligations.
The best way to manage your accounts receivable and get paid faster is to use accounting software like ZarMoney. With ZarMoney, you can accept credit card payments, prepare and send invoices, and send automatic payment reminders to customers.
The Accounts Receivable Process
The first step in the A/R process is to create an invoice and send it to your customer. Generally, you’ll want to do this as soon as you’ve provided your agreed-upon services or shipped your customer the goods ordered.
The second step in the A/R process is to review your A/R report weekly and send reminders to customers for invoices coming due. The final step is to ensure that you get paid for the services and products that you have provided and to mark your books accordingly.
If you use accounting software like ZarMoney, this process is streamlined from sending invoices online to generating A/R aging reports. However, if you use a manual system to manage your accounts receivable, such as Microsoft Excel or Word, then it will take a bit longer.
How to Manage A/R: Manual System vs Accounts Receivable Software
The most important part of the A/R process is to create the invoice promptly. Because small business owners like yourself wear so many hats, it’s easy to forget to invoice a customer once you have completed a job or shipped their products. The longer it takes you to invoice your customer, the longer it will take to receive payment.
The 3 simple steps you need to take are: Record the sale, keep track of the due dates, and record payments received promptly.
Depending on whether you use a manual system like Excel spreadsheets or accounting software like ZarMoney, will determine the exact steps that you take. We will discuss both of these in more detail next.
1 - Record the Sale
By using ZarMoney to send invoices, you are recording the sale, updating your sales and accounts receivable accounts, and sending an invoice all at the same time. At minimum, you will need to complete the following fields:
- Customer Bill to/Ship to Address
- Invoice Date
- Services/Products Sold
- Due Date
The beauty of using an accounting software program like ZarMoney is during the setup process, you add all of your customer’s contact information.
That way, when you are ready to create an invoice, you will select your customer’s name , and all of the pertinent customer information, such as the bill to or ship to address and payment terms, will populate automatically on the invoice.
ZarMoney also allows you to set up your list of services and/or products that you sell, similar to customer name. You can select these items quickly from a drop-down menu and add them to the invoice. Once you have made all of your selections, your invoice should be similar to the one below:
Moreover, ZarMoney will automatically create a journal entry for you so you don't have to.
If you are using Excel spreadsheets or the pen and paper method, then recording the sale will be a two-step process as opposed to the one-step process when you use accounting software like ZarMoney
Step A―Create Invoice
If you’re using spreadsheets to create invoices, similar to ZarMoney, the invoice should include the following information:
- Customer Bill to/Ship to Address
- Invoice Date
- Services/Products Sold
- Due Date
Step B―Record Journal Entries
If you need to record an invoice and you don’t use accounting software like ZarMoney, then you will need to record a journal entry. A journal entry is a manual way to record business transactions like customer invoices. It should include an effective date, debit amount, and credit amount.
Let’s say that you have a retail store where you sell caps and T-shirts. You need to record a sale made to a local high school booster club that purchased 20 T-shirts at $5 each. Below is the journal entries that you would record for this product sale:
Journal Entry #1:
Debit Accounts Receivable $100
Credit Product Sales Income $100
To record sale of 20 T-shirts on account to booster club
Journal Entry #2:
Debit Cost of Goods Sold $40
Credit Inventory $40
To record the sale of 20 T-shirts at a cost of $2 each
2 - Keep track of Due Dates
If you use accounting software like ZarMoney, then you don’t have to worry about keeping track of when your customer invoices are due. Once you set up payment terms in your accounting software, you can set up reminders to alert you a certain number of days before the invoice is due or once the invoice has become past due. Also, you can run an accounts receivable aging summary report to see which invoices are current, coming due, or past due.
If you’re not using accounting software like ZarMoney, then you will have to set up a reminder on an electronic calendar like Outlook or Google for each customer invoice. This should be done immediately after you create and send the invoice to your customer. Otherwise, you may forget and, before you know it, the invoice due date has come and gone.
3 - Record Payments Received Promptly
For your A/R aging report and other financial statements to remain up-to-date, you must record payments received from customers promptly. When you record payments in ZarMoney, it will mark the invoice as paid automatically, decrease the A/R balance and increase your Cash/Bank account balance. This will ensure that your profit and loss and balance sheet reports remain updated.
You can use multiple ways to mark an invoice as paid manually. The key is to set up a system that works best for you and stick with it as long as it is working for you. If a customer pays by check, We recommend that you make a copy of the check (before you deposit it.) Scan a copy of the check and save it to your computer. You can set up an electronic filing system to keep track of important business documents, including how long you must keep documents on file before you can toss them.
If you want to save yourself time going forward, consider using accounting software like ZarMoney. With ZarMoney, you can invoice customers and track payments easily so that you stay on top of your accounts receivables. Plans start at just $15 a month.
How Accounts Receivable impacts your Financial Statements?
Earlier in this article, we discussed the journal entries that should be recorded for the sale of products and services. In this section, we would like to discuss the journal entry that you need to record once you receive payment from your customer and the impact it has on the financial statements.
Record the Payment Received
Let’s go back to our retail store that sells caps and T-shirts. If you recall, we sold 20 T-shirts at $5 each for a total sale of $100. Let’s look at the journal entry that ZarMoney or you would record when the payment is received:
Debit Cash $100
Credit Accounts Receivable $100
The journal entry to record the sale of a product/service is identical; A debit to accounts receivable and a credit to Services/Product Income. The Income account would appear on the P&L report as an increase to the account.
The A/R account is an asset account that would appear on the Balance Sheet report as an increase to the account.
The second journal entry that needs to be recorded for the sale of products is a debit to Cost of Goods Sold and a credit to Inventory. The Cost of Goods Sold account would appear on the P&L report as an increase; the Inventory account would appear on the Balance Sheet report as a decrease.
The journal entry to record the payment is the same for both the sale of a product/service. The Cash account is an asset account that would appear on the Balance Sheet report as an increase; the Accounts Receivable account is also an asset account and would appear on the Balance Sheet report as a decrease.
I hope that the information we have provided to you will inspire you to take immediate action. I guarantee if you implement some, if not all, of our recommendations, managing your accounts receivable balances will become a breeze.