What is Accounts Receivable (AR) Automation, and How Does it Work?

Accounts Receivable (AR) automation has been around for quite some time.  BusinessWire reported in 2021, 23% of businesses reported sparing no expense in leveraging this technology to optimize the collections process. However, there is still skepticism among the people. The “AI hype vs. reality” conversation has sparked a vast debate on whether automation and algorithm-based management are truly the best for accounting going forward. Many companies have found great success with automation. Big market players like Sage reported to the Journal of Accountancy that they have made great leaps thanks to automation and AI implementation in accounting. 

Putting the ethical debates aside, today, we will dissect what it means to have AR automation as part of your accounting function. The goal is to paint a clear picture of the following:

-What accounts receivable involves as a business function,

-How AR automation supplements or deters AR efforts, and

-Whether AR automation is the right choice for your business.

By the end of this discussion, we hope to provide some much-needed clarity and empower entrepreneurs to make informed choices concerning AR automation. 

What are Accounts Receivable?

As mentioned in a prior Expertise Accelerated publication, which we do recommend as a complementary reading experience to this, 

The accounts receivable function is responsible for managing invoiced payments for services rendered that customers have not paid.

Put bluntly, any amount still owed to the business by customers or collaborators is counted as accounts receivable. The AR function’s job is to keep track of all such outstanding payments and ensure prompt collection when the time comes. 

The electric bill is a great example to illustrate the AR function’s operations. Electric companies tend to bill you after you have used electricity over a specific period, typically monthly. In technical terms, they are selling you the electricity first, and then at the end of the month, they send you the bill depending on how much you have used. You have already received the product for the month and are paying for it a month later. That electricity bill is considered accounts receivable, as it is money that you, as a customer, owe the electric company for goods you have obtained already. The bill is them ensuring prompt collection of that outstanding invoice. 

What is Accounts Receivable (AR) Automation?

AR automation is the implementation of automated receivable invoicing and debt collection measures to facilitate the AR process and promote efficiency. In simpler terms, AR automation is when a business leverages accounting software to issue invoices at the time of service or product sales, issue collection notices to debtors, and send reminders to accountants when a collection is due. The point of AR automation is to reduce the manual labor that goes into running the AR function. Instead of your accountant having to issue and record invoices and then regularly check to see if a payment is due, automation cuts out the menial labor portion of the work and frees up your accountant or accounting team for more important tasks.

How AR Automation Works and Why It Matters

Carrying on the electric bill example, say that your bill comes in on the 20th of every month. Without AR automation, you would need an AR professional to look at the power consumed, manually generate an invoice, and issue it. This would take up several minutes of their time. Now imagine this same work needing to be done for every client. 

With automation, all of this manual process becomes automated. Once a customer purchases, the software automatically records the transaction and generates the invoice. It typically sends it to the customer via email. All of this can happen in a matter of seconds with automation. Plus, as long as the data in the database is accurate, the chances of errors are reduced drastically. Then, when it’s time to collect payment, the software will issue automated reminders to the accounting team. It will also automatically alert customers that their payment is due.

AR Automation Improves Cash Flow

As you can imagine, manual AR slows down the credit-to-cash cycle for the business. It can also greatly limit the business’ operational capacity. The longer it takes for the business to realize a credit transaction into tangible cash, the more limited options it has for future growth. 

AR automation is a great way to harness the power of technology and unleash the full potential of your business. As reported by PYMNTS, 62% of firms reported Days-Sales-Outstanding (DSP) improvements after leveraging automation. DSO is the metric that determines how fast the business is getting paid by customers. The faster the DSO, the faster cash flows into your coffers and the more capital you have to work with when making business decisions. 

AR Automation Boosts Accounting Efficiency

Manually managing AR can greatly hamper your accountant’s performance. Having to do the same manual menial labor daily will induce burnout sooner or later. It is just unhealthy for your accounting function in the long run. Sure, you would end up paying a couple of thousand dollars to access the software but think about how much growth you can achieve when your accountant has a few more daily hours to spend on activities that demand human attention. 

Whether leveraging an in-house accountant or outsourced accounts receivable solutions, you’re still paying a fair bit to have an accounting professional onboard. Instead of wasting their time and your investment by putting them up to automatable tasks, make the most of your investment by involving them in places where they can shine. 

For example, any CPA worth their salt can address advanced accounting matters, such as budgeting, financial planning, resource allocation, cash flow projections, financial forecasting, etc. On top of all this, accountants are invaluable assets that should be present when making decisions. They can provide immensely important insight and advice on the best course of action from a financial point of view.

Every extra speck of information you have when making a business decision is worth its weight in gold. Your accountant can only provide that information once they have untangled themselves from the burdens of manual accounting responsibilities. 

AR Automation Covers for Human Error

Manual AR is very susceptible to human error. One wrong number entered can drastically change an invoice and cause you to lose money trying to fix it. Also, there is a decently high likelihood that your accountant may simply forget that a collection is due. This due collection could go unnoticed for weeks and cost you precious cash flow that could have made a difference earlier. 

AR errors are not business-threatening, but why take unnecessary risks? With AR automation, businesses can significantly lower the human error rate when it comes to AR and save a lot of time and money that can be allocated elsewhere. 

Conclusion

We surmise that we have taken enough of your time today, so the discussion ends here for now. We hope our experts can translate the heavily jargonized realm of accounting into something more digestible for everyone. 

The point we are trying to make here is that whether you like it or not, automation technology is here to stay. Instead of fearing and avoiding it, businesses need to start opening themselves up to it. At least give it a shot. If it is not worth it, at least you can rest easy that you did everything you could rather than regret not having leveraged AR automation in hindsight.