Accounts Receivable and Bank Reconciliation Automation: A Complete Guide

Landline phones are a dying breed and will soon become endangered. On the other hand, more than 3 billion users across the globe rely on smartphones to store contacts, communicate on the go, check emails, and more. This is what happens when you don’t foresee the potential impact of how technological advancements can benefit users. Guess what? This applies to every business.

So, if you are still relying on paper-based processes for managing accounts receivable and bank reconciliation, it’s time to upgrade and automate. Dive deep into the nuances of manual AR processing and how automating it will revolutionise your business in this article. 

What Is Accounts Receivable and Why Does It Matter?

Accounts receivable, also popularly known as bills receivable, refers to the money your business is owed by customers and third parties such as companies, borrowers, and even banks. This usually appears in businesses that sell goods or services on credit. 

Simply said, accounts receivable is the process of keeping track of pending payments and the process of collecting them. The process includes different things like sending invoices, recording, closing, and matching payments, and closing accounts with bank reconciliation. You can find the accounts receivable in the general ledger or balance sheet of your organisation. 

Not sure why accounts receivable matters? Here is why:

• Financial Liquidity and Stability: Diving deep into the accounts receivable process helps you gauge financial stability. Additionally, you can keep an eye on the accounts receivable-to-sales ratio to understand what hasn’t been paid for. 
   
• Vulnerability Factor: Accounts receivable process plays a key role in helping businesses understand the level of financial vulnerability they are in. For example, a business with a handful of customers tends to be more vulnerable than the one with a diversified customer base. 
   
• Allowance for Bad Debts: Many customers default on their payments, compelling the business to accept the loss. Accounts receivable reporting allows businesses to predict this by analysing allowance for bad debts i.e. the assumption that all receivables will not be paid.

Managing the accounts receivable process properly requires staying on top of multiple processes which are usually handled manually. Here’s what the process looks like.

Manual Accounts Receivable and Bank Reconciliation Workflow and Challenges

While the accounts receivable processing workflow varies depending on the size of the firm, the basic process remains the same. In most cases, larger organisations will deploy highly skilled accounting professionals and cutting-edge technology to handle these processes. On the contrary, smaller firms do it all manually. So, here’s what the process looks like:

• Credit Approval Process and Terms: Building solid credit practices is crucial for organisations doing business on credit. For example, the credit approval process helps them decide the credit-worthiness of an applicant and establish the terms & conditions at the onset of the relationship. If you are building a credit approval process for the first time, here are the steps that you would typically follow:
   
  • Credit Application: The first step is to create a credit application form. You can either build it from scratch or use a template. This credit application form must contain all the terms and conditions compliant with the credit practice-related federal laws.
     
  • Credit Terms: The next logical step is to create credit terms. Depending on the state of cash flow at your business, you can opt for tighter or flexible credit terms. Before making any credit sale, you must inform the customer about the approved credit terms.
     
• Creating AR Invoices: Once you sell products or services on credit, you’ll have to create accounts receivable invoices for these customers. In some organisations, a receivables invoice is created automatically from the quote/ sales order accepted and signed by the customer. Handling this manually means your accounts team has to create invoices, send them to customers, and post them manually in the ledger. For example, here’s a journal entry for sold products worth $1000.

• Tracking Accounts Receivable Balances: Once the invoices are sent to customers, your accounts team has to stay on top of accounts receivable balances. When invoices pass due dates, your accounts team will check the bank account statement for payment deposited, record payments, and allocate them to invoices. After accounting and posting all payments, the team usually issues monthly statements to customers. When done on excel sheets manually for a large number of invoices, it is highly possible to miss payments or record wrong payments against invoices. 
   
• Accounts Receivable Accounting: At this stage, your business needs to identify unpaid debts and make necessary entries in the journal. This helps you to be aware of bad debts, unpaid debts, and gain insights into early payment discounts.
   
• Bank Reconciliation for Accounts Receivable: Bank reconciliation for accounts receivable means checking the AR ledger against the statement issued by the bank, identifying mismatches, and reasons for these discrepancies. Accounts receivables are usually reconciled by checking customer balance to the aged trial balance report or any other similar AR  ledger report.

Executing the entire accounts receivable and bank reconciliation process manually poses a number of challenges for the AR team. Some of the most pressing problems are:

• Above Average DSO (Days Sales Outstanding): DSO or Days Sales Outstanding refers to the time credit sales take to convert into cash. If your company has a DSO higher than the industry standard, it means your clients are taking way too much time to clear their debts. Under such circumstances, your accounts team will have to manually follow up which is time-consuming and a productivity-killer. With automated accounts receivable processing, you can offer multiple payment options, automate follow-up emails, and offer discounts for early payments.
   
• Recording and Maintaining Data: If your accounts team is maintaining accounts receivable data on spreadsheets or using multiple systems to organise them, chances are high that you have no visibility over the state of revenue at your organisation. Moreover, organisations using paper-based processes may end up losing crucial documents, therefore creating a cash-flow deficiency. Implementing a robotic process automation-enabled accounting receivable process helps you to store data digitally and create a single source of truth (SSOT) with integration to your existing ERP, CRM, or other operational billing systems. Moreover, you’ll be able to automate different rule-based audits and analyse the financial health of your company.

• Maintaining Information Flow: Maintaining client information and facilitating appropriate communication is another challenge for businesses. For example, a business may end up delivering items at the wrong address when they forgot to update the new business address of the client. Automating the client communication process helps your accounts receivable team to stay on top of customer data, payment terms and due dates, billing reminders, recurring invoicing schedules, and much more. 

• Cash Management: Think what your accounting team goes through when your business accepts a large volume of paper checks and processes them manually. With minimal remittance information on paper checks, they face a mammoth challenge in the course of reconciling these payments. The more time this process takes, the longer you have to wait to access working capital. With automated accounts receivable and reconciliation processing, your business can encourage digital payments. Moreover, you can deploy auto-matching for accepted checks. 

Other common challenges of manual accounts processing include:

• Lack of collection or increased bad debt
• Inconsistent credit assessments
• Missing information
• Inadequate reporting
• Manual data entry mistakes
• Slow approval processing
• Vulnerability to fraud

Accounts Receivable Process Automation: Why Should You Go For It?

By now you know that the paper-heavy accounts receivable process can’t really offer your business a swift and accurate monthly close. Moreover, manual processes fail to provide you with controls or visibility into payment collection and processing. Cut to automation — improved financial close, easy access to business documents, a single source of truth for transactions and collections — that’s what happens when you decide to integrate robotic process automation for accounts receivable process. The difference is quite visible, but how does automation do it all? 

• Invoice Creation and Delivery: RPA-enabled accounts receivable processing can seamlessly automate invoice creation and delivery. Depending on customer preferences, it can easily schedule invoice delivery via email, fax, EDI, etc. Moreover, these invoices can be created in compliance with preset regulations and standards. The biggest advantage of this is that your accounts team saves a lot of time that would otherwise go into creating invoices, archiving them, maintaining compliance, and sending them based on delivery preferences. 
   
• Payment Processing and Capturing: Once the invoices are sent to customers, your accounts team gets busy with capturing payment data, assigning them to invoices, and adding them to the ledger. RPA bots can easily take care of the entire process, starting from capturing digital payments via customer portal to matching them with invoices to making reconciliation reports. This helps you to reduce DSO and save billing costs as well. 
   
• Collections Management: At this stage, the biggest task for the collections team is to manage disputes, monitor late payments, and reconcile collections. Automated accounts receivable systems can manage the entire workflow without letting a single important detail slip through the cracks. From sending automated reminders to capturing data from bank transactions, RPA bots can do it all.

So, what are the benefits of automating your accounts receivable and reconciliation process?

• Greater Accuracy: Eliminating manual processes helps you to reduce the chances of error and ensures greater data accuracy.
   
• Lower Costs: Once you start running the entire accounts receivable process digitally, you won’t be needing mailrooms, consumables, etc., which ultimately reduces your operating costs.
   
• Better Visibility: Having a bird’s eye view of the entire accounts receivable and reconciliation operations helps you gain insights into the financial strength of your business and make key strategic decisions. 
   
• Lower DSO: With minimal manual effort involved, your invoices and payment reminders are automatically sent, ultimately reducing the Days Sales Outstanding (DSO).
   
• Superior Customer Experience: A positive collections experience via a convenient digital portal and automated dunning notifications and reminders boosts the experience of your customers. You can go a step further here by creating a self-service customer portal where customers can apply for credits, manage payment preferences, and more.
   
• Time Savings: With automation doing the heavy lifting, your accounts team can concentrate on completing value-added activities.
   
• Higher Productivity: Replacing sticky notes and excel sheets means your employees are no longer involved in time-consuming manual tasks. This increases their productivity and involvement in issue resolution.
   
• Efficient Cash Collection: An automated accounts receivable processing system contributes to the top line and bottom line by collecting cash faster with timely invoice delivery, automated reminder emails and calls, and faster reconciliation. 

Top 2 Accounts Receivable Process Automation Tools in 2022

1) Plooto: Plooto is another account receivable process automation tool that helps you get paid faster. It comes loaded with features like pre-authorised debit (PAD), recurring payment, client management, accounting integrations, payment reporting, automatic accounting reconciliation, and more. 

2) Custom Integration Solution: If you already have an existing ERP system that your team loves, you shouldn’t look for another tool. Instead, you can simply integrate your ERP’s AR module with the operational systems  and a bank to automate the invoice creation  process, capture the data in ERP, and automate invoice matching and reconciliation. Having handled accounts receivable and payable integration for businesses of all sizes, NeeVista can help you build and maintain this kind of integrated system. 

Optimising Your Accounts Receivable Process With Automation

Businesses often don’t realise that they have cash trapped in their balance sheets. Optimising the accounts receivable process with automation enables you to improve operational efficiency and have a working capital that truly works for you. Besides providing you with added liquidity, it helps you lower costs, reduce debt, maximise shareholder returns, and ultimately fund growth. Getting cash-fit isn’t easy but here are a few principles that can help you:

• Not All Customers Are Good Customers: Once you create the credit policy with market realities in mind, ensure that your sales team sticks to it. There may come situations when your customers want you to override credit limits but you shouldn’t do without an assessment.
   
• Don’t Keep Credit Applications Hanging: Successful organisations achieve long-term accounts receivable success with a robust credit approval policy. You can’t apply the same mechanism to evaluate the creditworthiness of a larger and a smaller company. Before approving applications from larger companies, you must do a full background and credit history check. Automating this part of the process is crucial to seamlessly onboarding new customers without taking on additional risks.
   
• Maintain Accurate Customer Master Data: An accurate customer master data includes correct payment terms, credit limits, tax rates, discounts, billing and shipping addresses, return policies, etc. A single mistake is more than a data entry error and can ruin the reputation of your business. Maintaining this database accurately gets insanely easier when you deploy an automated accounts receivable processing system.
   
• Invoicing Isn’t As Straightforward As It Seems: Invoicing may seem straightforward but it isn’t. When you have to create and send thousands of invoices, and if you do it all manually, the chances of errors are really high. Be it generating invoices or sending them on time, your finance team should implement standardised practices to ensure invoicing, accruals, and collection. 
   
• Don’t Let Payment Followup and Allocation Become a Nightmare: Failure to allocate payments to invoices, apply a payment to each account, and making journal entries are crucial for accounts receivable success. The entire process needs to be done timely in order to avoid any confusion. With automated ERP finance systems, you can easily avoid all these hassles.
   
• Become Proactive in Collecting Receivables: Collection efforts, if not maintained frequently and consistently, can make it immensely difficult to see the cash flow. To make it happen on time, your organisation needs a robust accounts receivable process, if not automation. 

Whether you want to fix your existing accounts receivable process or want to find a new AR automation solution that automates manual tasks, the first step is to understand and evaluate your current state. Once you know the gaps to fill, it becomes much easier. NeeVista consultants  work with you to help you minimise these gaps besides making it easier for your finance team to maintain the process and track performance. Time to make your hard-earned money work hard for you!