Accounts Receivable (AR) Automation: A Complete Guide to AR Automation

Your company provided goods or services to customers on credit, and now it’s time to collect. Successfully executing that transaction is the job of the accounts receivable (AR) team, which sends invoices, processes payments, and then reconciles the books. It’s a time-consuming process when completed manually, especially if you must contact customers multiple times to track down payments. Accounts receivable automation software can do much of that work for you and free up your AR team to analyze the bigger financial picture, potentially helping to increase profitability.

What Is Accounts Receivable Automation?

Accounts receivable automation is exactly as it sounds—a way to automate the repetitive, tedious tasks that comprise the accounts receivable process needed to collect money that customers owe to the company. Successful accounts receivable automation speeds up the credit-to-cash cycle—all those steps that need to be taken between a customer purchasing a product or service on credit and the company receiving payment for the order.

AR automation empowers businesses to manage their receivables more effectively, resulting in fewer errors, lower costs, and improved cash flow.

Key Takeaways

• Accounts receivable automation replaces the manual tasks involved in invoicing customers and collecting payments, which can save a company both time and money.
• Studies show that companies that switch to automation also see an improvement in their days sales outstanding, or the average number of days it takes a company to collect payment after a sale; this can improve cash flow and profitability.
• AR automation provides a business with more accurate data, allowing a company to improve its customer outreach by automatically generating invoices, emailing payment reminders, and providing multiple payment options.

Accounts Receivable Automation Explained

Prior to automation, accounts receivable was a completely manual process, full of multiple steps and details that were managed by hand. AR automation technology reduces much of the manual labor and streamlines the entire process, providing employees with time to work on higher-value tasks and increasing the chances a company can collect the money it’s owed in a timely fashion.

By automating AR, you can reduce the risk of billing errors, invoice customers sooner, and simplify the payment-reconciliation process.

How Does AR Automation Work?

The workflow may differ from one company to the next, but the basic steps of accounts receivable remain in place with automation: invoicing, payment collection, reconciliation, and reporting. Here’s a basic overview of how automation is applied to each:

• Invoicing: When a sale is completed, AR automation software automatically generates and sends an invoice to the customer via email or another preferred method.
• Payment collection: The system presents customers with various electronic payment options, such as online portals or integrated payment gateways. It can also send automated reminders for upcoming or overdue payments.
• Reconciliation: As payments are received, the software automatically matches them with the corresponding invoices in the system. The AR ledger is updated in real time.
• Reporting: Detailed reports and dashboards are automatically generated to provide an instant look into the company’s AR status, cash flow, and customer payment behaviors.

Throughout this four-step process, the AR automation software integrates with existing accounting systems for a seamless flow of data. This reduces the need for manual data entry or data transfers between platforms, saving teams time and resources.

How Does AR Automation Help Businesses?

AR automation helps business by making their accounting practices more consistent, accurate, and efficient. Companies can gain real-time insights into AR, and by automating tasks such as invoicing, payment collection, and financial reporting, they can manage their finances more smoothly and gain clearer insights into their financial positions.

In addition, automation makes it easier to generate timely invoices in formats that meet the customer’s accounts payable requirements while decreasing the number of times the AR team needs to input key data points, such as invoice details, payment terms, and customer-specific information. Once this data is entered into the system at the time a customer makes a purchase, it seamlessly follows the customer’s account through the span of the payment process. For example, if a client is supposed to be billed on the 10th of the month, invoices will be automatically generated and delivered to the customer that day.

AR automation also supports tracking different payment types, matching invoices to sales orders, and monitoring aspects of collections by flagging issues such as expired credit cards. Companies can establish early payment incentives and apply late payment fees to encourage timely transactions. The AR database provides real-time reporting on invoice and payment statuses while enabling automated customer communications. This comprehensive approach AR helps businesses maintain better control of their cash flow and strengthen customer relationships.

AR Automation Benefits

By offloading tedious manual tasks, automation simplifies the work for AR teams. When these employees can depend on software to get invoices out on time and alert them to problems, they are able to focus on more strategic activities that may increase customer satisfaction.

Additional benefits include the following:

• Streamlining the workflow:

  Reducing the time spent on processing paperwork and payments creates a more efficient workflow and lets your AR team focus on more strategic work to help the business excel.

• Facilitating cash flow:

  Saving time in the workflow leads to faster invoicing, which should generate faster payments and thus improve cash flow. It also can help decrease a company’s days sales outstanding (DSO). According to a 2023 study, 85% of CFOs at companies that have automated more than half of AR processes cited a decrease in DSO.

• Reducing costs:

  Implementing e-invoicing reduces paper and ink usage, increases storage space in the office, and dramatically cuts down on postage and delivery fees. Automation typically saves businesses money in other ways, too; for instance, by lowering labor costs and cutting down on the number of write-offs for unpaid invoices.

• Increasing accuracy:

  Automation greatly reduces human error, improving data consistency. That often leads to less duplication of invoices, fewer billing disputes—and happier auditors.

• Enhanced reporting:

  Automated AR dashboards provide real-time reporting on the status of customer payments and assists with tracking AR aging, the method of categorizing unpaid customer receivables based on the length of time the debts are past due. With automation accurately tracking the status of open receivables, business managers can take timely action to enhance the likelihood that the company will get paid.

• Improved customer relations:

  With automation providing greater accuracy, businesses are likely to have fewer problems with customer billing and payment reconciliation. That, in turn, keeps customers happy and leads them to trust your company more. It also shortens the time you may have to spend tending to customer complaints.

• Easier compliance:

  The more markets a company does business in, the more geographically specific requirements it must manage. The laws and regulations in one state or country may not apply in another area. Automation software can keep track of these complexities.

AR Automation Drawbacks

While automation increases efficiency and productivity and decreases time spent on mundane and tedious work, some businesses may still hesitate to make the move. Employees who are accustomed to manual processes might resist adopting new technology over concern about needing to learn new skills.

Other commonly cited concerns include:

• Difficulty of use:

  The switch to automation can be a minor or a drastic change, depending on how manual a company’s current AR process is. It may take time to become accustomed to new software. But soon enough, the automated process becomes second nature for employees using it—and it lightens the AR team’s workload.

• Loss of control:

  While some business leaders may worry that their companies will lose some control with automation, the exact opposite is often true. How so? Businesses can tailor automation software programs to incorporate their own policies and procedures. For example, automation could send a payment-reminder email to a customer seven days before a bill is due, followed by another email when a bill is three days past due, and it could trigger a phone call to the customer at 10 days past due—the pace and content of messaging is completely up to the company, as is the decision on when to bring human staffers into the process.

• Cost of Implementation:

  A business switching to automation will incur the cost of the software and the expense of training its employees to use it. However, these costs are usually offset by the savings the company sees from increased efficiency and productivity. And, depending on the software they use, costs and training may be incremental.

What AR Processes Can My Business Automate?

While automation can significantly improve AR processes, there are practical and strategic limitations for any business. It’s not a matter of a technical limit, generally, but rather a balancing act between efficiency, control, and retaining human oversight.

Businesses can maximize their benefits considerably by automating these AR tasks:

Invoicing

The main purpose of a successful accounts receivable process is receiving the funds owed to the company, and the first step in making that happen is invoicing customers. With AR automation, those invoices are generated automatically and can be delivered digitally in seconds. If VAT or sales tax applies, an automated system will identify the applicable rate for each transaction to ensure the correct amount of tax is collected.

Payment Reminders

AR automation can send timely, customized payment reminders to customers based on predefined schedules. These reminders can range from gentle nudges to firmer follow-ups and final notices, all personalized according to a customer’s history and payment patterns. Reminders can help reduce late payments, improve cash flow, and minimize the need for manual follow-ups.

Digital Payment Processing

Businesses can institute a digital payment process to collect payments more quickly, thus improving cash flow. The right automation implementation for a business could provide customers with a variety of payment options, such as allowing customers to establish automatically recurring payments. Companies can set up automated clearing house (ACH) payments or use peer-to-peer payment apps, as well. And after a company receives payments, the system can send automated receipt notices to customers.

Compliance and Regulation

AR automation systems can be tailored to meet industry-specific regulations and compliance requirements, such as GDPR for data protection in the European Union or PCI DSS for secure payment processing. These systems can maintain proper documentation, uphold data security, and generate audit trails to reduce the risk of noncompliance and potential penalties, even across evolving regulatory landscapes and different jurisdictions.

Reporting

Automated AR tools can generate real-time, customized reports that focus on specific metrics, such as DSO and aging receivables, as well as cash flow forecasts, using data from multiple sources (e.g., sales, customer service, and finance). These reports can be automatically scheduled for regular distribution, supporting proactive detection of payment trends or issues and powering more accurate financial planning and forecasting.

Top Features/Components of AR Automation Software

Business managers want accounts receivable records to be accurate and timely while making it easy for customers to pay their bills. AR automation software has several key features to help businesses accomplish both goals.

• Invoice generation and distribution:

  Generating and distributing invoices is the cornerstone of AR, and automation software can do all that work. Timely invoicing can accelerate payments and improve the company’s cash flow.

• Automated emails:

  This “set it and forget it” feature allows you to program specific triggers to generate emails to customers to, for example, notify them several days before a payment is due and contact them again, if necessary, if a payment is late.

• Transaction matching:

  When money comes in, it needs to be applied to the correct account. AR software tools can match a customer payment to an open invoice, thereby reducing DSO, as well as limiting the manual effort of cash application.

• Multiple points of payment:

  AR software should offer customers as many ways to pay as possible, including check, ACH, credit card, wire transfer, and peer-to-peer sharing platforms.

• Credit risk and management:

  When a company provides products and/or services on credit, it takes on a certain amount of risk. AR automation allows businesses to identify customers that may be prone to making late payments or defaulting on payments. By enabling the business to keep track of trends in customer behavior on both the individual and aggregate level, it can make better decisions on how much credit to extend and to which customers.

• Disputes and deductions:

  At some point, a customer may challenge a charge on an invoice. Being able to easily deduct the disputed charge and re-invoice the customer speeds up the resolution of the issue and shortens the wait time for the proper payment.

• Data reporting:

  Real-time intelligence and data analysis can detect payment trends, help manage risk, and track DSO. With automation, businesses can also parse customer data based on a particular segment or category, for example, or monitor department productivity—that is, they can analyze the number of invoices created, or collection calls completed, by individual staff members.

How to Implement AR Automation

Moving to AR automation from a manual practice requires a holistic digital reorientation of payment processing. Here are seven key steps to implementing AR automation:

Step 1: Consult with all stakeholders

Talk to everyone involved in the current receivables process. Learn precisely how they do their work to help smooth the transition to automation, since software can be tailored to each company’s needs. Bring in not just the AR team, but colleagues from IT and management. Also consider talking with the clients with whom you do frequent business to gather additional input. Once you begin automating the AR process, you may want to periodically check back in with all stakeholders to see how they feel the implementation is going.

Step 2: Clearly explain the goals of the switch

Automatonophobia is the fear of human-like figures, such as robots that are designed to represent humans—and as artificial intelligence (AI) becomes increasingly sophisticated, some people may develop concerns about losing their jobs to automation. As you implement AR automation, clearly state the goals behind the move. It could be that the long-term goal is to allow the business to expand its customer base, or it may be looking to create new roles for employees so they can handle more strategic tasks.

Step 3: Integrate accounting software

Once you have selected and purchased an AR automation solution, the next step is to integrate it with your existing accounting software. This will help organize and align existing accounts receivable data with the new system.

Step 4: Automate payment reminders

Remember, the key goal of AR automation is to collect payments. Setting up automatic payment reminders to those who owe a payment is an important part of the automation process and saves time for the AR team. During this step, you can determine the timing for sending out payment reminders.

Step 5: Select and connect payment options

There are far more ways to pay a bill now than ever before, so you’ll want to determine which payment platforms and methods the company will accept for payment. Make those choices, then implement the various options with your software.

Step 6: Review your books before running automation

Before automating, thoroughly review your existing AR records. Verify that all outstanding invoices, customer balances, and payment histories are accurate and up to date, paying special attention to recently received payments that may not have been reconciled yet. If payments have been received but not properly recorded, the automated system might mistakenly send out payment reminders for already-paid invoices.

Step 7: Reconcile and report

With a regular reconciliation of accounts receivable, you won’t have to annoy or confuse your clients with unnecessary payment reminders when they’ve already paid. You can use the reconciling process as a reference point for assessing how the automation process is working, so you can make any necessary adjustments.

AR Automation and AI

AI is playing an increasingly important role in enhancing AR automation capabilities. AI-powered systems can, for instance, analyze vast amounts of data to identify patterns and predict payment behaviors or spot fraud early. Some AI-powered features to keep in mind include:

• Predictive analytics: AI algorithms can forecast which customers are likely to pay late or default, allowing businesses to proactively manage high-risk accounts. This capability helps reduce DSO and improve cash flow management.
• Anomaly detection: AI can quickly identify unusual patterns or discrepancies in financial data, helping prevent fraud and catch errors before they escalate into larger issues or impact financial accuracy.
• Intelligent cash application: AI can automatically match incoming payments with corresponding invoices, even when the payment information is incomplete or inaccurate. This significantly reduces manual reconciliation efforts and human error.
• Smart collections: AI-driven systems can determine the most effective collection strategies for different customer segments. They can personalize communication timing, channel, and content based on individual customer payment histories and preferences.
• Natural language processing (NLP): Advanced AI systems can interpret and respond to customer queries, handle disputes, and process unstructured data from emails or documents to further simplify the AR process.

Choosing the Right Accounts Receivable Automation Software

The right AR automation software is the one that best fits your business’s needs, so the best way to start the product-evaluation process is to ask for the input of employees who perform the work now. They already know the accounting workflow in detail, so they’ll be able to help determine your organization’s unique AR software requirements, as well as point out any potential hiccups in the AR process—and how to address them.

Thinking beyond the business requirements, it’s important that AR automation be embedded within the organization’s accounting system and be able to invoice customers using a variety of formats. If the organization does business internationally, it’s crucial that the software has the necessary support for all the countries where the business operates.

NetSuite Accounts Receivable is cloud-based software that allows businesses to capitalize on the benefits of automation, from generating and sending invoices to managing collections and offering multiple payment options. The goal with such a solution is to shorten your credit-to-cash cycle and shrink DSO.

Money earned should be money collected. The essential role of accounts receivable is to make certain that a business receives the money it’s owed in a timely manner. Implementing AR automation makes the AR process more efficient, thus accelerating customer payments, which, in turn, improves a business’s cash flow and, in the long run, its profitability.

Accounts Receivable Automation FAQs

How does accounts receivable automation work with ERP systems and electronic invoicing?

The right AR automation solution improves collection efficiency, cutting down on the need for manual intervention by the AR team. When embedded with an enterprise resource management (ERP) system, the AR software can pull customer and sales data that’s already in the ERP database and use it to automatically trigger delivery of electronic invoices to customers. Similarly, an AR automation solution embedded with ERP can pull in details about invoices that are due soon or that are past due, triggering automated customer reminders and/or alerting the AR team to intervene, depending on the business’s policies. With AR automation, businesses can also embed payment links in emails and send automated communications to customers.

What is an example of accounts receivable?

When a utility company sends a bill to a customer for the electricity, gas or water the customer has used, the company is asking the customer to pay for those products and services. The customer’s pending payment is an account receivable for the utility company. In another example, a cell phone company may allow a customer to make payments on a new cell phone over a period of 24 months, so each pending payment is an account receivable for the company. Many businesses operate this way, allowing a portion of their sales to be financed on credit, especially for customers with a reliable payment history.

What is the importance of accounts receivable management?

A business needs to collect the money it’s owed for the goods and services it provides. Effectively handling accounts receivable allows a company to manage the process of collecting customer payments, which helps paint an accurate financial picture for the business. Automating the AR process leads to faster collection of payments, fostering an improved cash flow and a stronger relationship with customers.

What does accounts receivable software do?

Accounts receivable software aims to lower costs, improve cash flow and increase productivity. The software can standardize invoices across a business’s entire customer base, as well as handle communications on payment due dates and help reconcile the books.

What is accounts receivable workflow?

An account receivable begins with the sale and delivery of a product or service, triggering a series of steps that includes generating and sending the customer invoice. This is known as a workflow. The next step in the workflow is to process customer payments. Depending on the business, customers typically have a 30, 60 or 90-day window to pay. Once payment is received, AR staff match it against the open invoice to ensure the correct amount was paid. In the case of a partial payment, another invoice may be necessary to collect the remaining amount, sending payment reminders ahead of the due date or distributing late payment notifications after the due date has passed.

What are some accounts receivable best practices?

Every company has its own way of doing things, but following these AR tips can help businesses collect the money they’re owed and decrease their days sales outstanding (DSO):

• Send timely invoices. Sending invoices to customers in a timely manner can help ensure prompt payment, especially if you automate those communications.
• Make it easy for customers to pay. Why wait for a check to arrive in the mail if you can collect that debt digitally? Offer customers multiple payment options and integrate them, allowing a customer to click and pay right from the email you send.
• Keep an eye on the slow payers. Some accounts will remain outstanding no matter how many times you contact customers. Monitor the reasons for nonpayment, including, for example, disputed charges, as well as the number of days a payment is late.
• Automate AR. Automation makes the AR process run more smoothly and quickly, allowing your company to save time and money. And it keeps your company in step with the latest digital trends in business.