What happens when a company collects cash from accounts receivable?

The collection of cash from accounts receivable is a critical financial process directly impacting a company's financial health. When businesses sell goods or services on credit, they create accounts receivable—essentially extending short-term loans to their customers. The process of collecting these receivables and converting them into cash through automated collections software is fundamental to maintaining healthy cash flow and sustaining business operations.

Understanding what happens when a company collects cash from accounts receivable involves examining a web of interconnected processes, stakeholders, and systems. While finance teams traditionally focused on how to calculate cash collected from accounts receivable manually, modern solutions like debt collection software have transformed this process. This evolution is crucial to the order-to-cash cycle, serving as the bridge between credit sales and realized revenue. For finance leaders and AR professionals, mastering this process can mean the difference between struggling with cash flow challenges and maintaining a good financial position.

The traditional cash collection process

Traditional cash collection from accounts receivable typically follows a structured yet labor-intensive pathway. The process begins when a payment arrives, whether by check, wire transfer, or other payment methods. AR teams must then undertake several manual steps to properly process these payments.

These manual steps often include opening mail, sorting payments, preparing bank deposits, and recording payment details in various systems. Teams must also match payments with corresponding invoices, a task that becomes increasingly complex when dealing with partial payments or payments covering multiple invoices.

Documentation requirements in traditional processes are extensive. Teams need to maintain records of original invoices, payment receipts, remittance advice, and any correspondence related to the payment. These documents serve multiple purposes, from supporting accounting entries to providing audit trails.

Common bottlenecks in traditional processes include:

• Manual data entry errors.
• Delayed payment processing.
• Missing or incorrect remittance information.
• Time-consuming reconciliation processes.
• Limited visibility into payment status.

Read the blog → What is accounts receivable? Definition, importance, and examples

The successful collection of cash from accounts receivable involves multiple stakeholders across the organization.

• AR team: As the primary owner of the process, the AR team handles day-to-day operations, payment processing, and maintenance of accurate records. They are responsible for ensuring payments are properly applied and documentation is complete. Their expertise in payment processing and reconciliation makes them the cornerstone of cash collection.
• Treasury departments: These teams play a crucial role in managing the company's cash position, establishing banking relationships, and ensuring proper controls are in place. They work closely with AR teams to optimize cash management strategies and maintain adequate liquidity. Their oversight helps ensure that collected funds are properly managed and utilized to support business operations.
• Customer service team: When payment issues arise or customers have questions about their accounts, customer service teams become an essential link in the collection process. Their role in maintaining positive customer relationships while supporting collection efforts cannot be overstated. They help balance the need for timely payment with maintaining strong customer relationships.
• Management: Providing direction and monitoring alignment between collection processes and broader financial objectives falls to management. This includes setting policies, reviewing performance metrics, and making decisions about technology investments. Their oversight ensures that collection processes support business objectives while maintaining control.

Financial impact of cash collection

The impact of cash collection goes beyond simply receiving payment. When a company collects cash from accounts receivable, it directly affects working capital management and various balance sheet accounts. While this conversion from receivables to cash keeps total assets unchanged on the balance sheet, it improves liquidity. Collection processes help maintain optimal working capital levels, ensuring businesses can meet their operational needs and growth objectives.

Days Sales Outstanding (DSO) serves as a key metric in understanding collections. Lower DSO indicates more efficient collection processes and better cash flow management. Conversely, higher DSO may signal collection challenges that require attention.

The implications for cash flow are significant. Timely collection of receivables ensures steady cash inflow, supporting everything from payroll to inventory purchases. This regularity in cash flow helps businesses maintain stability and plan for future investments.

When cash is collected from accounts receivable, several accounting entries must be recorded to maintain accurate financial records. These entries reflect a fundamental accounting principle: as cash increases, accounts receivable decreases. This is typically recorded as debiting cash and crediting accounts receivable, though the specific entries may vary depending on payment methods and circumstances.

Updating customer accounts requires attention to detail and proper timing. Account updates must reflect not only payments received but also any adjustments, discounts, or write-offs. This accuracy is important for maintaining customer relationships and ensuring proper financial reporting.

The reconciliation process serves as a critical control point, ensuring that all collections are properly recorded and matched to the appropriate customer accounts. This process helps identify discrepancies early and maintains the integrity of financial records.

Today's businesses have access to various electronic payment systems that streamline the collection process. These systems reduce manual handling and accelerate the conversion of receivables to cash. Electronic payment methods offer advantages in speed, security, and traceability compared to traditional paper-based processes.

Automated Clearing House (ACH) transactions have become increasingly popular for B2B payments, offering a cost-effective method for collecting receivables. Credit card processing, while involving merchant fees, provides immediate payment confirmation and reduces collection uncertainty.

Digital payment platforms continue to evolve, offering new ways to facilitate payments and improve the customer experience. Virtual card acceptance represents a growing trend in B2B payments, offering enhanced security and automated reconciliation capabilities.

Cash application best practices

Implementing cash application procedures requires a strategic approach focused on key areas:

• Payment matching procedures: These form the foundation of cash application. Best practices include standardizing payment acceptance methods, implementing clear naming conventions, and establishing procedures for handling exceptions. Organizations should develop consistent procedures that can handle both straightforward payments and complex scenarios like partial payments or payments covering multiple invoices.
• Exception handling: A balanced approach between automation and human oversight is crucial for exception management. While many exceptions can be resolved through automated rules, some situations require manual review and decision-making. The key is establishing clear guidelines for when automated handling is appropriate and when human intervention becomes necessary.
• Remittance processing: This step involves capturing all relevant payment information accurately and linking it to the appropriate invoices. Proper remittance processing ensures that payments are applied correctly the first time, reducing the need for corrections and adjustments later. Organizations should establish standardized procedures for capturing and processing remittance information from all payment channels.
• Bank reconciliation: This serves as a control point in the cash application process. Regular reconciliation ensures all collections are properly recorded and accounted for, helping maintain accurate financial records and providing early detection of any discrepancies. Organizations should establish clear procedures for timely reconciliation and follow-up on any identified discrepancies.
• Error resolution: When discrepancies occur, having clear procedures for investigation and resolution helps maintain processes. This includes establishing clear ownership for error resolution, setting timeline expectations, and maintaining proper documentation of all resolution activities.

Read the blog → How to improve accounts receivable collections

The collection of cash from accounts receivable must adhere to various security protocols and regulatory requirements. Payment security measures protect sensitive financial information and prevent unauthorized access to payment systems.

Data protection requirements continue to evolve, particularly concerning customer payment information and financial records. Industry regulations may impose specific requirements on how payments are processed, recorded, and reported.

Maintaining proper audit trails becomes increasingly important as payment methods diversify. These trails must document the entire collection process, from payment receipt through final application and reconciliation.

Common challenges and solutions

Companies face several significant challenges when collecting accounts receivable, but modern solutions offer ways to address them:

• Delayed payments: This is one of the most significant challenges in collecting accounts receivable. Companies must balance maintaining customer relationships with ensuring timely payment. The solution lies in proactive communication strategies and automated reminder systems, which can help address late payments while preserving customer goodwill. These automated approaches ensure consistent follow-up without straining customer relationships.
• Incomplete remittance information: This common issue creates bottlenecks in the cash application process, slowing down the entire collection cycle. Modern solutions address this through intelligent document processing and automated data extraction capabilities, reducing manual intervention requirements. These technologies can accurately capture and process remittance information from various formats and sources.
• Payment application errors: When not caught and corrected quickly, these errors can ripple through the entire accounting system. The solution comes through automated validation checks and exception management workflows that help identify and resolve issues. These systems can flag potential errors before they impact other financial processes and provide clear audit trails for corrections.
• Resource constraints: Organizations often find their ability to manage collections limited by available resources. Automation technologies offer a solution by helping organizations scale their collection operations without proportionally increasing headcount. These tools can handle routine tasks, allowing existing staff to focus on more strategic activities that require human judgment and intervention.
• System integration issues: When various financial systems and payment platforms don't communicate, it creates processing delays and data accuracy problems. Modern AR automation platforms address this through standardized integration capabilities and flexible architecture, ensuring smooth data flow across all systems.

System integration challenges may arise when connecting various financial systems and payment platforms. Modern AR automation platforms address this through standardized integration capabilities and flexible architecture.

Key performance indicators provide essential insights into collections. Beyond traditional metrics like DSO, organizations should monitor:

• Collection effectiveness index.
• Average days delinquent.
• Payment processing cycle time.
• Exception handling rates.
• Customer payment behavior patterns.

Collection metrics help organizations identify process bottlenecks and improvement opportunities. These metrics should be monitored regularly and used to drive process optimization efforts.

Cash application accuracy rates serve as a key indicator of process and control productivity. Regular monitoring helps identify training needs and system optimization opportunities.

Process automation metrics provide insights into the performance of automated solutions and highlight areas where further automation might be beneficial.

Business benefits of automated collection

Implementing automated collection solutions delivers multiple benefits across the organization:

• Cost reduction: Automated solutions drive down operational expenses through reduced manual processing requirements. Organizations can decrease the resources needed for routine collection tasks while improving accuracy and speed.
• Improved accuracy: Enhanced payment application and reconciliation processes reduce error-related costs and improve financial control. Automated systems ensure consistent processing and reduce the risk of manual errors that can impact financial reporting and customer satisfaction.
• Improved customer experience: More consistent and professional payment handling processes lead to better customer relationships. Automated systems provide customers with clear payment information, multiple payment options, and faster resolution of any issues that arise.
• Better cash flow management: Automation enables organizations to optimize working capital and support strategic initiatives through faster processing and more predictable payment cycles. This improved visibility and control helps organizations make better financial decisions.
• Scalability: Organizations can handle growing transaction volumes without proportionally increasing headcount, allowing for sustainable business growth without sacrificing processing quality or speed.

Successful implementation of modern collection solutions requires careful planning and consideration of various factors. System requirements must align with organizational needs and technical capabilities.

Integration capabilities should support connection with existing financial systems and payment platforms.

Staff training needs must be addressed to ensure utilization of new technologies and processes.

Change management plays a crucial role in successful implementation. Organizations must communicate benefits clearly and support users through the transition process.

ROI considerations should account for both quantitative and qualitative benefits, including improved customer satisfaction and reduced processing costs.

Through understanding and optimizing what happens when a company collects cash from accounts receivable, organizations can improve their financial performance and customer relationships while reducing operational costs. Modern automation solutions provide the tools needed to achieve these objectives.

For over two decades, Billtrust has been the trusted partner to finance leaders who demand more from their accounts receivable operations. As the leading provider of order-to-cash solutions, we combine deep industry expertise with innovative AI technology to help businesses control costs, accelerate cash flow, and deliver exceptional customer experiences.

Our unified AR platform processes over $1 trillion in invoice dollars annually, serving more than 2,400 customers worldwide. We understand that each industry faces unique accounts receivable challenges—that's why we've developed specialized expertise across 40+ industries, ensuring our solutions address your specific needs.

What sets us apart is our comprehensive approach to accounts receivable automation. While others offer point solutions, Billtrust delivers an end-to-end platform that transforms your entire order-to-cash cycle. Our AI-powered solutions automate critical processes, from credit decisions and invoicing to payments and collections, helping your team focus on strategic activities that drive business growth.

Ready to revolutionize your accounts receivable processes? Learn how Billtrust can help you achieve your financial objectives through intelligent automation.