Essential Business Guides

Where can your AR/AP process go wrong? Here’s how you can fix common problems

Mercy Johny
AR AP
Reading Time: 7 minutes

Your accounts receivable (AR) and accounts payable (AP) processes are a crucial part of your business. However, it’s easy to slip up and make entry errors, omit data, or mismanage teams. While some mistakes in your AR and AP processes are common, failure to correct them can be detrimental to your business. Poor cash flow, high costs, missed payments, inaccurate and unorganized data, and internal fraud are some of the vulnerabilities your business could be exposed to.

Fortunately, you can protect your business by improving your AR and AP processes. Read on to learn how you can improve your existing practices and build an effective AR and AP process for your business.

AR Process: Common errors and how you can fix them

Making sure you receive payment for a sale is key to running your business successfully. Here are some common mistakes that can negatively impact your receivables process:

Extending credit to all customers

Offering credit can make payments easier for your customer, but providing a credit policy to anyone requesting it can lead to non-payments by negligent customers.

To improve your AR process, review your credit policy regularly and only extend credit to customers who are likely to pay you back. Look into the customer’s financial health, and if they have a history of non-payment, think twice about offering them credit. If they’re existing, long-time customers, use your AR aging report to identify those who generally don’t pay up on time, and consider removing them from your list.

Develop well-structured credit policies that you and your staff are aware of, and a clear credit approval process, so your customers understand your terms. Create a credit score for each customer based on factors such as their credit history and repayment behavior, and keep updating it based on whether they pay early/late.

Not staying in contact with your customer

Your customers may want to pay you on time, but would hesitate if they have a question about their invoice or they’ve spotted an error. This type of payment delay can be prolonged by a lack of communication.

Reach out to your customers regularly (before and after issuing the invoice) so you can identify any gaps in the transaction, whether the rates are wrong or if the invoice was sent to the wrong person. By doing this, you ensure that all expectations are clear between both parties, which can help in speeding up payments.

Communication is easier if you’re using software equipped with a client portal, where you can easily collaborate with your customers and track the status of your invoices.

Not making optimum use of payment modes

Offering limited payment options makes it tougher for customers to pay you, as their preferred payment method may not be accepted. Yet another setback is the absence of an option for your customers to make recurring payments. Those who have to make regular payments to you may often miss their due dates, leading to late payments.

Offering multiple options (cash, check, credit cards, online payments, etc.) makes purchasing more convenient for your customers. You can simplify the process further for customers who make subscription-based and repeat purchases by offering a recurring payment option. This helps your customers pay, without being prodded by reminders, and ensures a steady cash flow for you, so you can plan your income and expenses. Just be sure to inform customers that you’ll regularly be debiting money from their accounts based on a schedule, and have a signed form permitting you to charge their card at regular intervals.

Utilizing a slow and manual AR process

If you’re manually managing your accounts, and working with outdated spreadsheets and ineffective reports, chances are likely that your data contains errors. This consumes your time, effort, and money. And of course, a slower process leads to slower payments.

This is why automation can be invaluable. Use a system with automation features, where you can quickly access all your essential AR information, from pending dues to reports. Automating your AR process simplifies your work and helps you automatically update your data in real time, leading to easy detection of errors, conveniently scheduled payment reminders, and streamlined workflows.

Combine these benefits with a sleek invoicing process by using software to manage your AR, and you can easily convert customer-approved estimates into invoices that can be paid with the click of a button. This can make your processes, from invoicing to payments, significantly smoother.

Ignoring outstanding invoices and having an above-average DSO

Regularly delayed payments from your customers can cause your cash flow to take a big hit. Your DSO (days sales outstanding) is a KPI that shows when you’re receiving delayed payments from customers. It measures when your credit sales can be converted into cash (i.e., the average number of days needed to collect payment). If you generally have an extended DSO cycle (cash conversion cycle), it means that your customers are taking too long to pay you back, and have potentially violated your payment terms.

Speed up your process by issuing invoices faster instead of waiting until the end of the month. You can issue invoices right after an order is placed, so your customers can pay you immediately after your products reach them. If they still don’t pay you, you can start looking for ways to recover your money effectively. It’s a good idea to employ a dedicated AR team that’s trained well and can recover overdue payments.

Moreover, don’t ignore your AR reports until the end of the year. Review these reports weekly or biweekly to flag overdue accounts, prevent further non-payments, and tackle any potential problems heading your way.

Miscommunication within the AR team

When there’s not enough collaboration within your AR team, there may be miscommunication that affect operations. For instance, someone who has already handled an invoice may fail to communicate this with another member of the AR staff. This can lead to duplicated documents, and potentially, fraud.

Distribute responsibilities among your team members, so major tasks, like overseeing payments, aren’t handled by just one person. That way, you’ll know what’s happening in your team, and the chances of fraud will be reduced.

For instance, when you receive a purchase order from your customer, review it (make sure the pricing and terms match your sales order) and ensure it’s authorized by the right person before issuing the sales order. Then, before you send the invoice, match it with the sales order and review the calculation. Having teams take care of each step will make it a smoother, fool-proof process for you to oversee.

AP Process: Common errors and how you can fix them

Paying your vendors may seem like an easy enough task. However, it’s a process that requires an effective system for preventing fraudulent activities. Here are some common setbacks you may face (and ways to tackle them):

Not automating your AP process

If you don’t have good accounting software already, you’ll be prone to making errors and losing track of payments. Your business forecasting may take a hit when your payables aren’t scheduled on time.

Improve your AP process with automation, so you can eliminate errors, ensure automatic backups, and improve efficiency. You can even schedule bill payments on a particular date, based on your anticipated cash flow. With updated and accurate reports, you can also analyze your future expenses and forecast accurately.

Skipping the first few steps of your payment process

When you skip issuing a purchase order, you increase the chances of making entry errors during the next step—billing. This could make it difficult to track the status of your payables.

Make it a regular practice to issue a purchase order first, and match this with your bill to cross-check the information. This will ensure that your bill is accurate and free of errors. When you have a streamlined process, you can easily convert a purchase order into a bill, make the payment directly, and close the bill. Following these steps from beginning to end will ensure that you have a smooth AP process.

To check the status of your payment documents easily, you can use software with a dedicated vendor portal. This helps you communicate with your vendors and share vital information about the payment status.

No system to prevent late/duplicate payments

Sometimes, you may forget to close a bill after making the payment, or you may receive the same bill twice. If you don’t have a system in place to flag these errors and track invoices, you could end up making duplicate payments. You may even have to deal with unauthorized purchases (if someone has accidentally made a purchase or has placed an order without getting it reviewed or approved).

Make sure there are approval systems in place, and that you pay bills only after you’ve received your purchases. Closing a purchase order once you’ve made the payment reduces the chances of accidentally paying for the same product or service twice. Record each payment you make, and mark it against the bill immediately.

While making payments, pay bills that have stricter terms first. You should also review your payments monthly to ensure that none have been duplicated.

Note: While making sales to your customers, you can get chargeback protection (protecting yourself from a customer contesting a charge on their credit card) to avoid duplicate payments.

Matching errors

If you haven’t matched your purchase documents correctly, you may not know whether you’ve received the right number of goods or whether you’ve paid the right amount.

Three-way matching is a simple solution for this. First, ensure your bill matches your purchase order, and that you’ve received everything you’ve paid for. Then, your warehouse staff will have to match the shipping receipt to the delivered goods. Finally, your AP staff should match the marked up shipping receipt to the bill. Three-way matching can prevent payment of bills before delivery, and moreover, you can be assured that you’re paying the right person.

Fraud

While fraudulent activities can affect multiple areas of a business, your payable process will suffer the greatest impact. It can be difficult to recover from a situation where there’s more money leaving your business than you calculated. Fraud can be both internal and external, and can include check tampering, malware, and phishing. In some instances, employees join forces with a supplier and arrange for illicit payments to be made to them. This can be accomplished through duplicate or fabricated payments, and can be prevented with regular reviews and an automated workflow.

You may be sent fraudulent invoices with details disguised as real information. So, examine what you receive, and have a standard procedure in place to identify fraud. Instead of entering invoices in batches without an audit trail, enter invoices individually. Creating an audit trail is important, as your logs will contain accurate details to help you prevent any fraudulent activity.

Moreover, regularly schedule risk assessments and monitor transactions to identify anything out of the ordinary. Besides this, make sure there’s appropriate supervision over the person you’ve authorized to make payments. You can tweak access controls for your accounting software, and make sure you have a proper workflow in place.

Set up advanced permissions to limit access to your bank accounts, so only authorized people can access and edit crucial information. When you have good communication with your staff and your vendors, combined with complete visibility and tracking over your payables, your payable process will improve.

Building a smart AR/AP process begins with automation. You can keep track of invoices, avoid payment delays, get updated information, and streamline your tasks. However, it’s also important to remember the values of good oversight, three-way matching, and other simple but effective solutions. With a steady accounting system in place, you can fortify your business, and improve your chances of growth and success.

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