That said, you're not alone if your company is continuously pursuing past-due payments or experiencing slow payment cycles. Businesses of all sizes struggle to maintain a healthy cash flow, and ineffective accounts receivable procedures are frequently the cause.

Accounts receivable is the money owed to a business by its customers for products or services that have been delivered but not yet paid for. Essentially, it's the company's outstanding invoices or what clients need to pay. The good news is that businesses with efficient AR processes can see up to a 30% reduction in payment cycles. In fact, businesses can achieve a 48% increase in cash flow predictability and reduce bad debts.

This blog will provide a step-by-step guide to managing your AR process with best practices. Isn’t it exciting? Moreover, selecting the right software will make all the difference in your accounts receivable management services, which you’ll learn about by the end of this guide.

So, are you prepared to transform your troublesome AR procedure into a well-functioning system? Let's get started!

In short, mastering your AR process keeps your business getting paid on time!

Why Do You Need an Account Receivable Process?

Not only does late payment slow down cash flow, but it also has a knock-on effect on other areas of your organization. Suddenly, you may find it difficult to pay for necessities like rent, payroll, or inventory restocks, forcing you to borrow money from reserves or incur needless debt. Even worse, studies reveal that cash flow problems account for 82% of small business failures, with ineffective account receivables management at the issue's core.

The bright side is that you can prevent these hassles and keep your business running without a hitch by collecting timely payments and establishing a well-organized AR procedure. You might ask why this matters to you. Well, when your AR process is solid, you’ll:

• Maintain liquidity: You’ll always have the cash you need to keep things moving.
  
• Boost profitability: With fewer late payments and less bad debt hanging over your head, you can focus on growing your business.
  
• Improve customer relationships: A professional AR process keeps things clear and reduces any confusion or disputes with your clients, helping you build stronger, long-term relationships.
  

How to Manage Your Accounts Receivable: A Step-by-Step Process

1. Customer Initiates an Order

The accounts receivable process officially begins when a customer places an order for your product or service. This step is crucial because it sets the stage for the rest of the process. Ensure all the details are documented, whether the order is made online, over the phone, or in person. This will help avoid misunderstandings later on.

• Necessary details: Ensure you capture all the necessary details, including the product or service ordered, pricing, and payment terms. This information will feed directly into the invoice.

Clear communication at this stage reduces the risk of disputes over the invoice later. Businesses that handle this step carefully experience fewer payment delays and disputes.

2. Customer Onboarding and Credit Check

Before you issue an invoice, it’s crucial to assess the customer’s creditworthiness, especially for new or high-value clients. Extending credit without evaluating risk can result in delayed or non-payments, directly impacting your cash flow.

• Run a Credit Check: Contact credit reporting agencies to gather detailed customer financial information. These reports provide insights into their payment history, outstanding debts, and financial stability.
  
• Check Trade References: Ask the customer for trade references from previous business partners. Contact these references to get an idea of how timely the customer is with payments.
  
• Review Public Financials: For larger clients, reviewing publicly available financial statements or using services can help you assess their credit risk.
  
• Set Credit Limits: Once you have this information, establish a credit limit that reflects the customer’s ability to pay without stretching your cash flow. Consider requiring partial upfront payments or reducing their credit limit for high-risk clients.

To avoid the risks of extending credit, you can offer cash-on-delivery (COD) or prepayment options. This ensures you get paid before or when the service/product is delivered, eliminating the risk of unpaid invoices. Another option is offering third-party financing, where a financial service handles the credit risk, and you get paid upfront while the financing company collects payments from the customer.

3. Setting Up Clear Payment Terms

Once the customer’s order is confirmed and credit is approved, it’s time to set clear payment terms. These terms should specify how long the customer has to pay, what payment methods are accepted, and any incentives for early payments or penalties for late payments. Here is how you can do it:

• Due Date: The due date is key. Common terms like “Net 30” (payment due 30 days after the invoice date) or “Net 60” are standard, but for quicker cash flow, shorter terms like “Net 15” or “Due on Receipt” can help.
  
• Late Payment Penalties: To ensure timely payments, add a late fee, such as 1.5% monthly, to overdue balances. This will encourage customers to pay on time.
  
• Early Payment Discounts: Offering discounts for early payments can boost cash flow. For example, “2/10 Net 30” means customers get a 2% discount if they pay within 10 days; otherwise, the full amount is due in 30 days.
  
• Accepted Payment Methods: Make it easy for customers to pay by accepting multiple options, such as bank transfers, credit cards, or PayPal. Specify these methods to avoid any confusion.

For larger or ongoing projects, offering installment payments can help ease the burden on your client while keeping a steady cash flow into your business. Make sure each installment has clear due dates and payment expectations.

4. Generating and Issuing Invoices

After the order has been fulfilled, the next step is to create and send the invoice. A professional, clear, and detailed invoice will make it easier for your customer to pay promptly.

What to include:

• Invoice number
  
• Detailed description of the product/service
  
• Total amount due, including any taxes or fees
  
• Payment terms and methods
  
• Due date
  

Timely invoicing is what you need right away! Businesses that send invoices immediately after the service is completed are 1.5x more likely to be paid on time.

5. Tracking Payments and Monitoring Due Dates

Once the invoice is sent, it’s important to keep track of its status. Many businesses run into trouble by letting unpaid invoices pile up without a proper system.

• Use of accounting software: The days of manually tracking invoices are long gone. Accounting software such as QuickBooks, Xero, Zoho Books, and others can automate the tracking process, allowing you to monitor who has paid, who hasn’t, and when follow-ups are needed. With these tools, you can set automated reminders for upcoming due dates or overdue payments, saving you the hassle of constantly checking spreadsheets.
  
• An Accounts Receivable (AR) Aging Report: This is an essential tool to help you visualize the state of your receivables. It categorizes your invoices based on how long they have been outstanding (e.g., 0-30 days, 31-60 days, 61-90 days, 90+ days overdue). This report helps you identify which customers are late and which invoices need immediate attention.

6. Sending Payment Reminders

Even with clear terms and due dates, some customers will forget or delay their payments. That’s where payment reminders come in handy.

• Automated Reminders and Professional Emails: Once an invoice is overdue, promptly send an automated email reminder using clear and direct language to indicate the payment is past due. Maintain a polite yet firm tone.

For example, you might say, "This is a courteous reminder that your invoice is overdue. We kindly request that you arrange payment as soon as possible."

Pro tip: Implement the "3-5-7 rule" for reminders. Send a reminder 3 days before the due date, another 5 days after, and a final one 7 days later if the invoice is still unpaid. This proactive approach often encourages clients to pay on time. Consistent reminders can lead to faster payments, with businesses seeing a 30% drop in overdue invoices by following this method.

7. Managing Collections for Overdue Payments

If your reminders are ignored and the payment is overdue, it’s time to initiate a formal collections process. This step can be tricky, but it’s essential to have a plan in place.

• < 7 Days Past Due: Send a polite, friendly reminder via email, gently notifying the customer of the overdue payment.
  
• 8–14 Days Past Due: Follow up with a second, firmer email or phone call, emphasizing the overdue status and offering assistance if needed.
  
• 15–30 Days Past Due: Send a formal reminder that includes any applicable late fees. This message should stress the importance of prompt payment.
  
• 31–45 Days Past Due: Issue a final notice, warning of possible consequences like service suspension or escalation if payment isn’t received.
  
• 46–60 Days Past Due: Maintain consistent follow-up, reaching out every 5 business days, urging payment resolution.
  
• 61–90 Days Past Due: If unpaid, consider escalating to senior management or involve a collections agency to recover the debt.

If the payment remains significantly overdue, you might want to consider involving an Accounts receivable management agency. Outsourcing to a professional agency can help you recover the outstanding amount faster and maintain a positive customer relationship. These agencies are experienced in handling overdue payments delicately, ensuring the process is professional and respectful.

8. Writing Off Uncollectible Debts

Despite your best efforts, there may be situations where a debt becomes uncollectible. When all attempts to collect the payment fail, you’ll need to write it off as a bad debt. This process involves removing the receivable from your books to accurately reflect your financial standing.

Writing off bad debts allows you to clear your accounts of uncollectible amounts, ensuring your balance sheet reflects accurate data. It also helps with tax reporting since bad debts may be deductible. This step should only be taken after exhausting all collection efforts, including contacting the customer, sending final notices, and possibly involving a collections agency.

9. Payment Processing And Reconciliation

Once a payment is received, it needs to be properly processed to reflect in your financial records. Payment processing includes verifying the payment, updating the corresponding invoice, and ensuring the payment matches the terms agreed upon.

Steps:

• Identify which invoice or customer account the payment applies to (bank transfer, check, credit card, etc.).
  
• Match the payment to the correct invoice using your records or accounting software.
  
• Verify that the payment amount matches the invoice. For partial payments, update records to reflect the remaining balance.
  
• Apply the payment to the invoice and update the customer’s account as fully or partially paid.
  
• Record any transaction fees, taxes, or discounts to ensure the net payment aligns with your deposit.
  
• Reconcile your bank statements with AR records weekly or monthly to catch any missed payments or errors.
  
• Flag any outstanding or discrepant invoices during reconciliation and take action, like sending reminders or escalating to collections.

10. Dispute Resolution

Occasionally, customers may dispute an invoice due to errors, misunderstandings, or dissatisfaction with the product or service. Dispute resolution is the process of addressing and resolving these issues to prevent payment delays or damage to customer relationships.

Steps:

• Acknowledge the dispute and investigate the issue by reviewing the invoice and relevant documentation.
  
• Communicate with the customer to understand their concerns and work toward a solution, which may involve issuing a corrected invoice or offering a partial credit.
  
• Once resolved, document the outcome and update your records accordingly.

11. Analyzing Accounts Receivable Data

The final step is to go deep into your AR data. Tracking Key Performance Indicators (KPIs) reveals how efficient your accounts receivable process really is. With the right KPIs, you can watch for valuable insights, identify cash flow bottlenecks, and take action to improve collections. Let’s explore the essential KPIs that can give you a clearer picture of your AR performance.

Key KPIs to Track in Accounts Receivable Analysis:

• Days Sales Outstanding (DSO):  DSO calculates the average number of days it takes your business to collect payment after a sale. This KPI gives insight into how quickly you’re converting receivables into cash. A lower DSO means faster payment collection, while a high DSO signals cash flow delays.
  
• Accounts Receivable Turnover Ratio: This KPI calculates how many times, on average, your business collects its receivables during a specific period (e.g., quarterly or annually). It’s a measure of how efficiently your business is managing its credit.
  
• Bad Debt to Sales Ratio: This KPI calculates the percentage of your receivables that are written off as uncollectible. It’s useful for understanding how much bad debt impacts your cash flow. The formula to calculate is -Bad Debt ÷ Total Sales.
  
• Collection Effectiveness Index (CEI): CEI is a KPI that evaluates the efficiency of your collections process. It measures how well your business converts outstanding receivables into cash over time.

Common Accounts Receivable Challenges!

Managing your accounts receivable comes with a few bumps along the way. Late invoicing and manual errors are just the beginning of the challenges in the accounts receivable process. But there are other hurdles you should keep an eye on, which create bigger headaches down the line. Let’s find out!

• Disputed Invoices: Sometimes, customers dispute an invoice because they believe it’s incorrect or they’re not satisfied with the product or service. For example, if you accidentally overcharge on an invoice, the customer might refuse to pay until it’s corrected, delaying the payment.
  
• High Days Sales Outstanding (DSO): DSO tells you how long it takes to get paid on average. A high DSO means customers are taking too long to pay. For example, you'll struggle to maintain a steady cash flow if you expect payment in 30 days, but customers take 60.
  
• Inefficient Collections Process: If your process for following up on overdue payments is inconsistent or delayed, you risk losing money. For example, waiting too long to send reminders can result in overdue invoices getting lost in the shuffle.
  
• Poor Communication with Customers: Not communicating clearly about payment terms or due dates can lead to confusion. For example, if customers don’t know they owe late fees, they might dispute the extra charges when they finally pay.
  
• Lack of Automation: Manually tracking invoices and payments can be exhausting and error-prone. For example, forgetting to send out an invoice reminder could lead to late payments, which slows down cash flow. Automating these tasks can make things much smoother.

The Best Accounting Software for AR Management & AP

You’ve encountered many of the challenges above—late payments, disputes, and inconsistent tracking. You might wonder how to streamline and make the accounts receivable process error-free. Well, here are all our answers! Accounting software tackles these challenges head-on, making your AR and AP processes more manageable. Now, let’s explore the top software options!

• QuickBooks: It is a popular choice for small and medium-sized businesses. It automates invoicing and payment reminders, making it easier to track payments. For example, if you’re waiting on a payment, QuickBooks will notify you when it’s overdue and automatically send a reminder. On the AP side, it helps manage bills and schedule vendor payments, keeping your cash flow in check. Quickbooks is a go-to solution for small businesses due to its ease in tracking and sharing invoices, monitoring employees time and resources, and many more! Furthermore, it helps in customer orientation and scaling businesses in long run. Do you want to know more about Quickbooks and how it stand out among other software, then here is the essential read: How to Use QuickBooks for your Business & How is It Different from Other Accounting Software?
• Xero: For businesses operating globally, Xero is ideal with its multi-currency support and real-time cash flow updates. For example, if your company deals with international clients, Xero will convert and track payments in multiple currencies, ensuring smooth invoicing across borders.
  
• Zoho Books: It is a budget-friendly solution that offers custom invoicing and integrated online payments. Small business owners can create professional invoices and set up automated reminders and hence, customers pay on time. Its affordability makes it an attractive choice for startups.
  
• FreshBooks: If you’re a freelancer or solopreneur, FreshBooks simplifies invoicing and expense tracking. For instance, if you bill clients by the hour, FreshBooks tracks your time and converts it directly into an invoice, making payments seamless.
  
• NetSuite: For larger enterprises, NetSuite is a powerful ERP system that automates complex workflows like recurring payments and offers real-time financial insights. For instance, a company managing multiple entities can track AR and AP across divisions with ease.

Transform Your Business with FBSPL’s Pro AR Management Solutions

Now that you understand the key steps in managing accounts receivable, are you still feeling drained by late payments or stretched thin with limited resources? If so, let FBSPL handle the heavy lifting. From generating spot-on invoices to automating payment processing, we take the hassle out of managing your accounts receivable so you can excel in other business areas!

Here’s how we make it compelling:

• Accurate Invoicing, Every Time: We’ll create and send invoices with precision so your billing process is smooth and crystal-clear for customers.
  
• Effortless Reconciliation: Our automated tools quickly identify discrepancies, keeping your financial records clean and helping you stay on top of cash flow.
  
• Compliance, Simplified: With transparent revenue recognition tailored to your needs, we make financial reporting and compliance stress-free.
  
• Quick Dispute Resolution: No more back-and-forth delays! Our structured workflow resolves customer disputes fast, maintaining great relationships and steady cash flow.
  
• Automated Payment Processing: Payments are tracked, allocated, and processed without any errors, so you get updates in real-time without the headaches.
  
• Clear Reporting: Get a full view of your cash flow with detailed insights and intuitive dashboards, making decision-making easier and faster.

Get in touch with FBSPL today and experience effortless AR management that drives your business forward!