Embracing the Future: AR Automation Basics, Definition, How it Works

AR automation marks a significant advancement in financial management – especially for businesses dealing with high-volume transactions. 

Ultimately, AR operations efficiency and accuracy are crucial for businesses to improve cash flow management, minimize bad debt, and ensure accurate financial transactions. 

Collections automation reduces manual tasks, enhancing efficiency and accuracy by minimizing errors. This leads to improved visibility into financial data, enabling informed decision-making and efficient credit management. 

In this article, we'll focus on how advanced solutions are revolutionizing traditional AR processes, aiming to give a thorough understanding of how it streamlines collections, reduces manual effort, and improves cash flow management. 

What are the biggest receivable challenges today?

The most crucial accounts receivable challenges for companies today include:

• Cash flow optimization: Ensuring consistent money inflow is challenging, especially with the sluggishness of manual processing and traditional payment methods. This impacts a company's cash flow and budget, necessitating the adoption of AR management technologies​​.
• Manual prioritization: Collection teams still get lists of delinquent accounts, put them on a spreadsheet, and then decide who to follow up with. If this wasn’t taxing enough, they manually customize and conduct follow-up activities afterward. 

• Reducing DSO: High DSO rates are problematic, often due to late payments. Streamlining invoice payments and offering various digital payment options can help reduce DSO​​.
• Context-less communication: AR teams exhaust a lot of time, especially when other stakeholders are involved, such as sales or customer success, to identify and share account/invoice-level context whenever disputes and escalations are involved. 

• Minimizing errors: Manual processing is prone to errors, and even with automation, there is a need for careful data input. Investing in AR automation can significantly reduce errors and streamline the receivable process​​.

• Electronic payment methods: The transition to digital payment methods is challenging but necessary for efficient receivable collections. Decisions around absorbing credit card processing fees or passing them to customers as convenience fees are critical​​.

• Implementing automation: The transition to receivables automation is a significant challenge, requiring careful planning and team buy-in. Automation can speed up payments and improve cash flow, but needs strategic implementation​​.

What is AR Automation? 

Accounts receivable (AR) automation utilizes technology to streamline and automate the management of a company's accounts receivable. It encompasses invoicing, tracking payments and due dates, managing customer credit, conducting collections, and payment applications. 

AR automation aims to enhance efficiency, minimize manual errors, improve cash flow management, and provide better analytics and reporting. 

Many companies use ERP software for receivables automation, but this approach has significant limitations, especially for unique use cases like managing high volumes of invoices. 

ERPs struggle with AR accounts prioritization and efficient AR collections strategies in high-volume operations, leading to increased days sales outstanding (DSO), lower cash flow, and lost productivity. 

Also, ERPs are designed as all-in-one platforms to manage various business functions, including sales, billing, and AR accounting. They often lack in-depth features for specific functions, such as providing operational visibility, enabling dunning automation, reducing manual tasks, or simplifying cash posting. 

This limitation makes it mandatory for ERPs to integrate with accounts receivable software for more complex tasks. 

How does it work?

Accounts receivable automation helps automate repetitive and tedious tasks involved in the AR process, streamlining customers’ financial transactions and expediting the credit-to-cash cycle. 

Here's a breakdown of how it functions:

• Process streamlining: The core activities of accounts receivable invoicing, collecting payments, and reconciling these two - remain central in automation. The software generates timely invoices, reduces manual data entry, and ensures data consistency throughout the payment process​​. 

• Workflow automation: Automation simplifies workflows, leading to faster invoicing and payment collection, thus improving cash flow. It also reduces human errors, thereby enhancing data accuracy and consistency. 

• Customer relationship management: Automated systems improve customer relations by providing accurate billing and payment reconciliation. They also simplify compliance with different geographical regulations and requirements​​.

• Real-time monitoring and analytics: AR Automation offers real-time invoice and payment status reports. It also provides insights into cash flow, DSO and ADP trends, and CEI. 

Why is it important to automate the accounts receivable process?

By automating the AR process, companies can streamline financial operations and gain strategic advantages through improved cash management, customer relationships, and data-driven insights.

• Minimize manual effort: It accelerates collections, reducing manual work and allowing staff to concentrate on strategic activities.
• Personalized dunning at scale: AR automation helps collectors set strategies for different segments of customers, depending on how soon (or late) they pay. Some AR tools also let you send personalized collection emails for better response rates.
• Improves data accuracy: Automation helps reduce errors common in manual data entry, leading to more precise billing and records.
• Helps enhance cash flow: More efficient billing and collections significantly improve a company's cash flow, which is crucial for its financial health.
• Improves customer experience: Automated systems ensure faster and more consistent customer responses, enhancing satisfaction.
• Provides real-time insights: Automation often includes analytics, offering deep insights into financial status and customer payment behaviors for informed decision-making.
• Improves cash posting accuracy: AR automation software helps automatically match payments and extract remittances. 

Automating the AR Process

Incorporating various best practices and solving potential challenges is critical to automating accounts receivables. 

• Determine where you want to be. Define specific goals for AR automation and establish metrics to measure progress​​.

• Assess your current state. Thoroughly review existing receivables processes and identify pain points and bottlenecks​​.

• Involve accounting stakeholders. Engage those who currently handle AR tasks early for smoother implementation​​. This helps solve prevalent collaboration challenges that exist today.

• Choose a champion for migration. Secure high-level executive buy-in and involve cross-functional team members, like sales or customer service personnel​​.

• Ensure AR software compatibility. Aim for an end-to-end accounts receivable softwarethat integrates with ERPs, CRMs, invoicing solutions, and communication tools.

• Establish the KPIs you want to track. Use KPIs to monitor performance and measure progress, such as day sales outstanding (DSO) and AR turnover​​ ratio (ARTR).

• Set up new workflows. Redefine workflows based on the new system, reallocating labor to new tasks where possible​​.

• Set up dashboards. Use AR dashboards to monitor customer balances and receivable activity with real-time data​​.

What NOT to do

When trying to automate the accounts receivable process, here are key things to avoid:

• Rushing the implementation: Avoid hastily implementing AR automation without thorough planning and understanding your needs.

• Neglecting training and change management: Pay attention to training your team on new systems and managing the change process.

• Ignoring data accuracy: Avoid underestimating the importance of accurate and clean data for successful automation.

• Lacking a customized approach: Don't use a one-size-fits-all solution; ensure the automation is purpose-built to fit your business's unique processes and requirements.

• Failing to integrate with other systems: Take advantage of integrating the AR automation software with other critical business systems for seamless operation.

• Ignoring customer experience: Avoid implementing automation that negatively impacts customer interactions and communications.

• Skipping regular reviews and updates: Remember to regularly review and update the automation system to match business and tech changes. 

Benefits and Drawbacks of AR Automation

The benefits and drawbacks of an automated accounts receivable process are multifaceted, positively impacting various aspects of a company’s operations. 

Let’s take a look:

Benefits of AR Automation

• Improved collections efficiency: AR Automation enhances productivity and accuracy, allowing staff to collect payments quickly and handle complex billing schemes efficiently​​. It also helps considerably reduce DSO.

• Reduced human errors: Automation significantly reduces mistakes inherent in manual invoice generation, such as duplications and typos, using integrated databases and automated matching​​.

• Cost savings: Increased productivity and accuracy lead to cost savings, as staff can focus on higher-value tasks, potentially reducing the size of the AR team. This also decreases the rate of uncollectible accounts​​.

• Enhanced dashboards: Accounts receivable dashboards provide real-time data and KPIs, aiding decision-making and daily tasks​​.

• Standardized processes: Automation standardizes processes across the order-to-cash cycle, improving insights into cash flow and customer account management​​.

Drawbacks of AR Automation

• Maintenance and implementation: Automated systems can be expensive to purchase, implement, and maintain, which can be a significant burden for small businesses​​.

• System failure risk: Automation depends on technology, and these could be susceptible to failures or breaches. As a result, this could cause potential payment delays and compromise sensitive financial information. 

• Reliance on paper payments: The industry’s reliance on paper payments has hindered the broader implementation of AR automation. Automating departments that still largely depend on paper checks can be challenging and error-prone​​.

• Data quality: The effectiveness of AR automation is contingent on the quality of data input. If companies rely on manual data entry for certain aspects, the potential for errors remains, affecting the overall efficiency of the automated system​​.

AR automation is not just a fleeting trend; it's the dawn of a new era in financial management. Many tools are at the forefront, leading businesses into a future where managing receivables is no longer a labyrinth of complexity but a streamlined path to success. 

As we've seen, the impact of this technology stretches far beyond just simplifying processes—it's about empowering businesses with the agility to navigate financial challenges and seize opportunities with unprecedented ease. 

As we embrace this digital transformation, the potential for enhanced efficiency, improved cash flow, and strategic financial decision-making becomes tangible for businesses of all sizes. 

AR Automation FAQs

Let's take a look at some of the commonly asked questions around accounts receivable automation in this section.

1. What does AR automation do? 

AR automation streamlines and improves the process of managing incoming payments for a business. It automates tasks like invoice generation, sending reminders, tracking payments, and updating financial records. This increases efficiency, reduces errors, improves cash flow, and boosts customer communication. It also provides valuable insights through real-time reporting and analysis of the accounts receivable status.

2. What is the difference between AP and AR automation?

AP automation focuses on streamlining outgoing payments a business owes to its suppliers or creditors. It automates processes like invoice processing, payment scheduling, and vendor communications. 

In contrast, AR automation deals with incoming payments a business is due to receive from its customers. It automates tasks like invoice generation, payment tracking, and customer communications. Essentially, AP automation manages money going out, while AR automation handles money coming in.

3. How do I automate accounts receivable in Excel?

• Create an invoice template: Include fields for invoice details, customer information, and amounts.
• Use Formulae: Implement formulas for the automatic calculation of totals and balances.
• Set up a customer database: For easy data retrieval and invoice updating.
• Conditional formatting: Highlight overdue invoices or essential data.
• Set up a dashboard: For a quick overview of receivables and payment statuses.
• Link related sheets: Ensure consistency and accuracy across different data sheets.

4. What are three types of accounts receivable?

• Trade receivables: Amount customers owe for products or services.
• Notes receivable: Formal promissory notes representing a PTP. It highlights that the customer will pay a certain amount at a future date. 
• Other receivables: These include various forms of non-trade receivables like interest receivable, tax refunds, advances to employees, and other non-trade-related debts owed to the company.