Accounts payable and accounts receivable departments are the most essential parts of any company. They make sure that any transactions that need to be made in your company are done safely and successfully. These transactions are done to pay vendors and customers (or other businesses if you have a B2B business). However, when there is money involved anywhere, you need to ensure the safety of the transaction method; otherwise, you might experience fraud.
This is why netting is necessary. Netting is the process of ensuring the safety of your transactions, and this article will walk you through how to net your AP and AR.
What is netting?
Netting is nothing but reducing the financial risk between two parties by aggregating a lot of financial obligations into a net obligation amount. This reduces risk from various factors like foreign exchange risk and bank exchanges. This also helps you to reduce operational costs and increase your efficiency. There are mainly two forms of netting, AP netting for your Accounts Payable department and AR netting, which works for your Accounts Receivable department. Although both are done through the same process, both of them are done for different reasons.
Netting is a fundamental process that needs to be done to ensure the safety of your company’s money. However, various setups need to be done to ensure the suitable netting of your company’s accounts. Once you do so, it is pretty easy to automate the process and check the result at the endpoints.
Why is netting important?
Netting enables your company to do away with many risks involved with foreign exchanges and bank transfers. For example, suppose you are outsourcing raw materials from a company that is located in a foreign country. Whenever you get your order and need to pay them, you need to be sure that the money you are sending is appropriately converted and not stolen by intermediaries. This is where netting comes to play. It ensures the safety of the funds being transferred and ensures that the vendors get adequately paid. Of course, this also works for accounts receivable for customers and for other businesses you need to receive money from.
These are essential things to keep in mind, especially when managing a large business. It also helps audit all your accounts which enables the company to do more than its capacity.
What is the netting process like?
Before implementing netting in your accounts department, you need to understand how it works. The netting process is very technical, so hold your breath while it is being explained. First, it creates transfer documents in a transfer batch from the source documents to close them. It then does what the average accounts payable/receivable system does and marks the amount paid as paid. Once this is done, it creates verified result documents and gives a netting number. This netting number makes sure that the transaction is safe; it acts as a unique ID for the transaction to be successful. This billing is often done after the shipment arrives.
An example of netting in AP & AR
Another example of account netting would be a simple vendor transaction (in the AP department) and a customer transaction (in the AR department). Suppose you have bought raw materials worth $4000 from a vendor. You need to pay him, but there is no security in the transaction. What you can do is very simple. While you are billing the invoices and getting your AP department to work on it, make sure that the transaction is netted when they make the payment. This way, even if the vendor is not from the same country as you, they will safely be able to receive your payment.
Similarly, for customers, you need to set up your accounts receivable department so that your transactions are netted. This means that any transaction the customer makes is safe, secure, and easy to access.
In conclusion, there is a simple moral in this article. Make sure that your accounts department is properly netted. While it makes sure that all your transactions occur safely and securely, it also makes sure that all the processes in your business are highly efficient. This sort of efficiency can also be reached by automation, but why dip your toes in just one great thing when you can benefit from both? Netting is a cost-effective process that significantly impacts your business, so you should go for it. It avoids the risks of being a foreign company and helps you convert any money you receive into your native currency. All companies should go for it as it is a practice with great benefits.