Account Receivables / Account Payables Management
  • 11 May 2023
  • 4 Minutes to read
  • Contributors
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Account Receivables / Account Payables Management

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Article summary

Accounts Receivable(AR) and Accounts Payable(AP) Management are two important functions within the finance department of any business.

Accounts Receivable Management involves the process of managing the invoices and payments that are due from customers or clients. The goal of AR management is to ensure that the company receives payments on time and in full.

Accounts Payable Management involves the process of managing the invoices and payments that are due to vendors or suppliers. The goal of AP management is to ensure that the company pays its bills on time and accurately.

The AR/AP management process typically involves delivering invoices to customers, receiving invoices from vendors, creating and approving invoices, tracking payment due dates, recording invoices and payments, reconciling payments to invoices, and handling discrepancies or errors in billing and payments. Both AR and AP management are crucial for the financial health of a business. Proper management of AR ensures that the company has sufficient cash flow to meet its financial obligations and operate smoothly. Proper management of AP ensures that the company maintains good relationships with its vendors and suppliers and avoids late fees or penalties. In addition, accurate management of AR and AP is critical for maintaining accurate financial records and ensuring compliance with applicable accounting standards and regulations. Effective management of AR and AP also helps to improve the efficiency of the finance department, streamline processes, and reduce costs associated with billing and payments.

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Importance of AR and AP

Accounts Receivable (AR) and Accounts Payable (AP) are both critical functions in the financial management of a business, and their importance cannot be overstated. Here are some reasons why AR and AP are important:

Cash flow management: AR and AP both play a crucial role in managing a company's cash flow. AR represents the money owed to the company by its customers or clients, while AP represents the money the company owes to its vendors or suppliers. Proper management of AR and AP ensures that a company has sufficient cash on hand to meet its financial obligations, such as payroll, taxes, and other expenses.

Relationship management: Effective management of AR and AP is essential for building and maintaining good relationships with customers, clients, vendors, and suppliers. By managing AR effectively, a company can ensure that its customers or clients pay on time and in full, which helps to build trust and credibility. Similarly, by managing AP effectively, a company can ensure that it pays its vendors or suppliers on time and accurately, which helps to maintain good relationships and avoid late fees or penalties.

Compliance: Accurate management of AR and AP is essential for maintaining accurate financial records and ensuring compliance with applicable accounting standards and regulations. Failure to comply with accounting standards and regulations can result in penalties, fines, and other legal consequences.

Efficiency: Effective management of AR and AP can improve the efficiency of the finance department and other related functions. By streamlining processes, reducing errors, and improving accuracy, a company can reduce costs associated with billing and payments, and free up resources to focus on other areas of the business.

Planning: Proper management of AR and AP provides valuable information for financial planning and forecasting. By tracking and analyzing trends in AR and AP, a company can make more informed decisions about future investments, expansion, and other strategic initiatives.

AR/AP Process

Accounts Receivable (AR) Process

Create invoices: The AR process begins when a customer or client makes a purchase or receives a service. The company creates an invoice that details the product or service provided, the amount owed, and the payment due date.

Deliver invoices: The company sends the invoice to the customer or client, either by mail or electronically.

Monitor payments: The company tracks the status of each invoice to determine when payments are due, and follows up with customers or clients as necessary to ensure that payments are made on time.

Record payments: When a payment is received, the company records the payment in its accounting system, and updates the customer's account to reflect the payment.

Reconcile payments: The company reconciles the payments received against the invoices issued, to ensure that all payments are accounted for and credited to the correct customer accounts.

Manage discrepancies: If there are discrepancies or errors in billing or payments, the company investigates and resolves them as quickly as possible.

Accounts Payable (AP) Process

Receive invoices: The AP process begins when the company receives an invoice from a vendor or supplier, either by mail or electronically.

Approve invoices: The company reviews the invoice to ensure that it is accurate and complete, and approves it for payment.

Record invoices: The company records the invoice in its accounting system, and sets up a payment schedule.

Pay vendors: The company makes payments to vendors or suppliers according to the payment schedule, either by check or electronically.

Reconcile payments: The company reconciles the payments made against the invoices received, to ensure that all payments are accounted for and credited to the correct vendor accounts.

Manage discrepancies: If there are discrepancies or errors in billing or payments, the company investigates and resolves them as quickly as possible.


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