For most businesses today, giving yourself an edge is critical. Allowing your clients terms when it comes to when and how they pay for goods and services is an excellent way to give your business an edge. Yes, we will be talking about accounts receivable. In this article, we’ll explore its history starting from ancient Mesopotamia to Excel to AR Automation today.
We all know the concept of account receivable is old. In fact, archeologists have found evidence that accounts receivable were in use in ancient Mesopotamia, as far back as 2000 B.C. The Code of Hammurabi laid out how these ancient contracts would work and what the rights of both parties were when it came to such agreements.
The next advance in accounts receivable came about in the Middle Ages. At that time, merchants would need to wait for payment until their goods were delivered. (It’s a far cry from the way we do business now – they would have to send the goods first and, only once they had delivered the goods, was the person obliged to pay for them.)
Because items often had to travel long distances, this could take quite a while. This could be extremely inconvenient for the merchant (just imagine what their DSO was like!). Naturally, it severely impacted their income.
The Knights Templar had, by this stage, formed the basis of a banking system. You would go to the local Knights Templar, and entrust them with your valuables and land. They, in turn, would make out Letters of Credit for you and you could travel with these instead of actual cash. You would be able to draw on these Letters of Credit with the templars of any city.
At that time, charging interest on money on loans was illegal because of the Church's anti-usury laws, but the Templars got away with doing so by charging "transaction fees" instead of interest.
Great, but what does that have to do with accounts receivable? It provided the framework needed for accounts receivable financing to come into being, in a similar manner to the one that we are familiar with today.
Remember our merchants who had to wait until the goods were delivered to receive payment? They could now access financing against the strength of those agreements. They would have to pay “transaction” fees but were able to raise finance through factoring.
What is Factoring?
This is where a company essentially sells its debt to a third party. Let’s say that a merchant in England was sending a shipment to Venice. It would be a cash on delivery situation. If the merchant wanted to get the money earlier, they would be able to use the debt as collateral.
This party would then be able to collect on the debt. The benefit for the third party was that they would pay the merchant a portion of what was owed. The difference between the actual invoice and the amount paid to the merchant would be their profit.
So, basically, if the merchant had an invoice for $10, the factoring company would pay out $8 to the merchant. They would then be entitled to collect the full $10 from the client and so would make $2 profit. If the client reneged on payment, the merchant would be responsible for paying the advance back.
New World Applications
Fast forward a couple of hundred years and the accounts receivable system is starting to become very useful, especially in the American colonies. Those living in the “New World” would send their goods to England in order to make money. They were able to get advances on the payments for these goods in cash, depending on how strong their accounts receivable was.
It was after the Industrial Revolution that the emphasis shifted more to how creditworthy the client buying the goods was. If the client was considered a good credit risk, the business's own credit risk would not come into play as much.
The Place of Accounts Receivable Today
It is extremely important to ensure that your accounts are correctly handled. You need to be able to tell, at a glance, how much a particular client owes, and how much your business has outstanding overall in order to properly manage your cash flows. This is where AR Automation comes in.
What are the Hallmarks of a Good AR System?
What do most advanced AR systems have in common?
- Information is updated in real-time: An AR system is really only useful if the data is updated immediately. You need to be able to have a look at a client account and see at a glance whether or not they have paid. The more up-to-date your AR records are, the better you are able to manage your company's cash flows.
- A streamlined workflow: A good AR system will enable you to manage all the different tasks one centralized place, creating a CRM for your accounts receivable.
- Workflow automation: Time-consuming tasks like identifying which invoices to follow-up on first, and emailing clients with reminders are all automated.
- Full communication history: Keep track and access with easy all your client communication history.
- Customers first: Allow your customer to access all their invoices through the system to download them, make a payment, and raise a dispute if needed.
Why Consider an Automated System?
No matter how streamlined your current AR process is, automating it can save you time and money. Capturing the invoices, sending reminders, marking off payments, etc. all take time.
Manual systems are fine but there will always be some form of delay between the time action is taken, and the time it is recorded.
A debtor's transaction on a manual system would look something like this:
- Client buys goods or requests services.
- The client is invoiced and has 30 days to pay.
- Diarise to follow up.
- AR Professional manually sends reminder to client to pay.
- AR Professional makes sure that payments are marked off at the end of every month.
- Further reminders are sent off if the client still doesn't pay, and the check/ reminder process repeat.
The manual process works but you have to find some way to keep track of the information. For a lot of companies out there, that means keeping track by using complicated Excel spreadsheets. And, while Excel makes this process easier, it still means that time and effort is wasted in keeping the system up to date.
Manual systems are labor-intensive, increasing the risk of human error creeping in. And, considering the technology at our disposal today, they are outdated.
With accounts receivable platform, the process is automated for you. All you need to do is to configure your workflows and system will automatically send out reminders. You are able to review AR aging reports at any time you like. You will be able to see which clients pay early and reward them accordingly. You’ll know exactly where you stand with each client.
Automation is a simple and cost-effective way to make your AR more efficient and scalable. You can free up your staff or yourself to manage things that are more important to growth, while still being able to keep a handle on this critical function.