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Accounts receivable - often shortened to AR or A/R - is the process of selling goods or services on credit, with payment received later under agreed credit terms. You’ll see this process in action in everyday life - whenever you pay a utility bill after having already used the water, electricity or gas, for example. And as a business owner, offering credit to trustworthy customers is a great way to expand.
This guide will give an overview of the AR process, and some smart ways to make it simple. We’ll also look at how your growing business might benefit from the Wise Multi-currency account for business.
The borderless account allows you to hold and manage multiple currencies, with low transparent fees - perfect if you want to connect with customers and clients based overseas. And you can find an example balance sheet and use our free balance sheet template. More on that later.
Accounts receivable refers to sales a business offers on credit. It’s common for companies to agree payment terms with a customer which mean they supply goods or services, and wait for payment within a given time frame.
For example, maybe you run a web design business, and work with regular clients under 30 day payment terms. That would mean you complete the project you’ve agreed, and send an invoice to your client, which they commit to pay within 30 days. The same might happen if you’re an importer, and sell to wholesale customers. You might send a delivery of your products to a customer, with the agreement you’ll receive payment within a 30 day window.
Accounts receivable payments are agreed under contract, and therefore are legally enforceable. The anticipated payment will sit as a current or short term asset on a company’s balance sheet until paid.
Offering credit to reliable customers is a smart way to increase sales. However, there needs to be a robust accounts receivable management process in place, to make sure payments are ultimately received. Poor accounts receivable management can lead to cash flow problems and damage business overall.
Accounts receivable management is an end to end process, from assessing whether or not a customer should be offered credit, determining credit terms, issuing and reconciling payment documentation, and chasing late or unpaid invoices as needed.
While the exact process used for accounts receivable might vary slightly from one company to another, there are some basic steps which are usually followed. Here’s a rundown of an AR process :
The first step, naturally, is to propose a costing for the goods or services your customer is looking for. This will usually be set out in writing for clarity - often using a proforma invoice.
With a new customer, the AR team will need to make a judgement about their credit-worthiness to decide what terms could be offered. Depending on the scale of your business, this might be a gut feel decision based on your own research into how trustworthy you believe the customer to be, or a more formal process, using credit reports such as those provided by a company like Dun & Bradstreet (DnB).
The terms offered may be customized, or you may take a common credit agreement, such as Net 30, which means the full payment is expected within 30 days. Businesses often agree payments within 30, 45, 60 or 90 days depending on the situation, and may offer discounts for faster payment, such as a percentage reduction in cost if payment is received within 10 days.
It’s important to also add details of what will happen if payment is late - a fee or penalty may be written into the agreement to deal with delinquent accounts.
Once all the terms are sorted out, you’ll ship the products or complete the agreed work, and issue an invoice confirming the sale.
AR teams will need to match up payments as they come in, to check that all customers settle their invoices as agreed. This could be a manual process, or could be done using software to help ensure the process runs smoothly.
If a payment is late or doesn’t match the invoice, the accounts receivable team will need to investigate. It’s common for late payment fees or penalties to be added to discourage customers from leaving invoices unpaid, so the AR team will need to confirm the process and requirements with the customer, and chase until payment is received.
If you’re building your business and plan on offering sales on credit, you’ll need a simple and effective accounts receivable process. This may initially be a manual process of reconciling payments, using a spreadsheet for example. However, as your company grows, you might need to automate AR to reduce your admin time.
Many accounting software services offer accounts receivable as part of their package for small businesses. Often you’ll need to pay a fee to access the more advanced functionality, but you may be able to trial different services for free before deciding which will suit you. You can also get specialist AR software which is designed to make payment processing easier, as well as reconciling your accounts.
Here are some of the major products you might want to consider:
- Intuit Quickbooks - Track invoices and payments in just a few clicks.¹
- SAP Business One - Full suite of accounting products which you can tailor to your needs²
- Sage - Manage AR, track inventory levels and forecast cash flow³
- Xero - Broad range of product features and pricing plans to suit your business - you can also integrate Xero with the Wise multi-currency account for business to save money on international payments. More on that in a moment.⁴
- Anytime Collect - Specialist accounts receivable solutions, processing over 1.2 million payments a month on behalf of customers ⁵
- Invoice Sherpa - Cloud based software which you can integrate with your existing accounting package if you need a little extra to run your AR process ⁶
Having a slick and effective AR process will mean your business can grow. This might mean taking on customers and clients overseas, and processing payments in foreign currencies.
If your business is expanding internationally, be sure to get the right business account so you can make and receive cross border payments without hefty fees. The Wise multi-currency account for business is a great solution, and integrates with your favorite accounting software to make it simple to reconcile payments.
With a borderless account you can hold your money in dozens of different currencies, and switch between them when you need to, using the mid-market exchange rate.
You’ll be able to receive payments for free in major currencies like US, Australian and New Zealand dollars, Euros and British pounds, so connecting with customers overseas is simple. And you’ll also be better off with a borderless account when you need to settle an invoice from abroad. Making payments is usually much cheaper than using a regular bank account, and 19x cheaper than an alternative like PayPal.
There’s no markup, no hidden costs, and accounts are free to open and operate. See how much you could save, with Wise Business.
👉 Looking to learn more about accounts receivable tools? Find out more below!
This publication is provided for general information purposes and does not constitute legal, tax or other professional advice from Wise Payments Limited or its subsidiaries and its affiliates, and it is not intended as a substitute for obtaining advice from a financial advisor or any other professional.
We make no representations, warranties or guarantees, whether expressed or implied, that the content in the publication is accurate, complete or up to date.
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