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Best Practices for Managing Accounts Receivable

Receivables management is a crucial aspect of any business and plays a vital role in maintaining positive cash flow. One of the key components of effective receivables management is implementing best practices to streamline the accounts receivable process, from credit management thru invoicing and finally the collections process.

Secrets of Getting Paid Faster

It’s All About Getting Paid Faster.

Many small business owners don’t realize how much cash is trapped in their balance sheets and they don’t understand or fail to pay attention to, the impact that trapped cash has on their ability to improve operational efficiency, fund growth, reduce debt, lower costs and ideally outperform their competitors.

Given the cost of new capital, no business, big or small, can afford to let its existing capital go to waste.

Implementing efficient systems and effective receivable processes to ensure timely payment of outstanding invoices isn’t the only way to protect your capital, but ignore it and you may end up unintentionally providing customers with free financing as well as other unintended and expensive consequences.

Most businesses have effective accounts receivable policies that at least spell out when to create and send an invoice, how much to bill, and hopefully, when to collect. But many small businesses don’t enforce those policies effectively – or sometimes at all.

Businesses that prioritize sales, (and let’s face it, who doesn’t?) often fall into the trap of extending credit to customers prematurely, i.e. no credit check, offering discounts, or ignoring payment terms. When it means winning new sales, accounts receivable is usually a far second or even third consideration, if it’s considered at all.

Weak, non-existent or a poorly enforced ar processes spells trouble for any business, big or small. To protect your bottom line watch for these red flags and warning signs.

Red Flag

Red Flags and Warning Signs

  1. Poor or nonexistent training on how to deal with late-paying customers
  2. Failure to send payment reminders to late-paying customers i.e. no collection process
  3. Incorrect payment allocation or failure to post payments at all
  4. Frequently overriding credit limits
  5. Shipping or providing service for delinquent customers

Best Practices for Managing Accounts Receivable

But this is an article about best practices. Here are five areas within the accounts receivable function that, if optimized, can help you free up cash and strengthen your working capital:

Credit Policy and Approvals (Management)

To ensure you have the best protection possible against customer default, establish and regularly review your credit approval process. Not all customers are good customers and your credit policy needs to reflect that not-so-pleasant reality.

Regularly review and update credit policies to ensure that they reflect the current business environment and financial status of your company. Credit limits are as much a function of what you can afford to finance as it is about what customers can afford to pay. Read that again! I cannot overstate how important it is for a small business to take into account its own financial position when extending credit. Don’t finance more than you can afford to lose.

This includes conducting regular credit checks on new and existing customers and adjusting credit limits as needed. This can help to minimize the risk of bad debts and improve the overall health of the accounts receivable portfolio.

Take these steps to be certain your credit approval process is thorough, efficient, and most importantly effective.

Write it down

Write it down.

A process is written down. If it can’t be referenced somewhere it isn’t really a process. So Step 1 is write out your credit policy and review it with your accounts receivable staff. Make it easy for your staff to know when and just as importantly when NOT to extend credit.

Make some decisions.

There are no real right answers here. Deciding when to run credit and on whom, how strict or lenient to be, how high credit limits should be are decisions that are specific to your business and your circumstances, but here are some questions that should be answered.

  1. Will you extend credit on small orders? What constitutes a small order?
  2. What size order requires a credit check?
  3. Do any customers get credit without a credit check? Who and Why?
  4. How will you establish credit limits? (A good rule of thumb is – don’t extend more credit than you can afford to lose – regardless of the credit worthiness of the customer) Credit limits are as much about what you can afford to loan (because that is effectively what you are doing) as they are about what they can afford to pay.
  5. What circumstances might merit overriding credit limits?
  6. How late can a customer be before you put an account on hold?

If a new customer is placing small orders, a simple customer information card may be sufficient. (see manage customer information below) Consider not extending credit at all on orders under X amount – where X represents a number than makes sense for your company. It might be $100 or $1000 it depends on the size of your average order.

Conversely, if a new customer is interested in purchasing large volumes on a regular basis, you may need a more stringent process, such as full background and credit history checks.  Watch out for new customers with large orders who are in a hurry – while exciting it’s often a red flag for problems down the line.

The aim is not to have finance interrupt the sales process, but to acknowledge as an organization that not all customers are good customers.

Commit to approving or rejecting credit applications within a certain time period.

How much time will you allow to process a credit application? It’s not uncommon for companies to lack policies around how long it should take to turn around credit applications. Delays could result in lost sales or worse (from an accounts receivable perspective) providing product or service prior to completing the credit review.

Credit Approval

 Regularly review the credit approval process.

Risk profiles change over time. Economic conditions fluctuate.  That means you’ll need to review your credit approval process regularly. Document your expectations as soon as you start using your new credit policy. What benefit specifically are you expecting? Here are some possibilities:

  1. Lower DSO
  2. Fewer late invoices
  3. Reduced bad debt losses

What else is important to you? Define your expectations – in writing! Did I mention you need to write all this down?

Review quarterly for the first year. Adjust anything that isn’t working as expected. Add or subtract policies as needed. In other words make sure it’s working for you and, if it isn’t, adjust. Once you’ve completed this process a few times and you’re getting the results you want you can review less frequently. But at least annually.

Info Management

Manage Customer Information!

I understand this sounds like a no brainer but it isn’t. Missing or incorrect customer contact information is one of the biggest obstacles to collecting accounts receivable quickly. This problem seems to be universal – ok, maybe universal is overstating but it’s common. It happens in small and large companies. Because sales people are optimistic and thinking best case scenario when making a sale. We’re not thinking about NOT getting paid, or NOT being able to contact accounts payable.

Master Data File (Hint: Use a CRM)

You need a master data file and policies and procedures designed to keep it accurate and up to date. You should collect and document at minimum the following information on every customer:

  • Correct mailing and physical address
  • Phone numbers
  • Primary business number
  • Your contact
  • Accounts payable
  • Emails for anyone you get a phone number for
  • Payment Terms
  • Credit limit
  • Tax Rate
  • Discounts

Create and use a form to collect the information you need and want.  A form is essentially a check list.  Use one to make sure you remember to get the information you need and want.  Enter the information in your CRM.

Review the form regularly and adjust as needed.  Implement controls to ensure accuracy and completeness.  Remember you need to “inspect what you expect”.  If you create the form but never check to be sure your staff is using it you won’t have accomplished anything.

Receivables Workflow

Use a CRM to record details and document activities with your customers. There are a lot of them out there, and it well worth the time it takes to research them. But while you’re searching for the perfect fit, Hubspot has a perfectly serviceable FREE CRM that makes it very simple and easy to document your communications and contact details on your customers.

Your CRM can also be an integral part of your collection process. A place to log all of your emails which Hubspot easily handles automatically.

I don’t love Hubspot for managing my workflow, but it records every email exchange automatically with an Outlook integration and you can schedule follow up with reminder – so if you have no budget for a CRM use it.

Accounts Receivable

Invoicing (Billing)

Another common place to make errors that result in uncollected accounts receivable is INVOICING. I’ve identified a total of 15 Common Invoicing Errors – I’m sure there are others I’m sure, but I’ve encountered these frequently enough to write an entire article about them. Here I’ll just give you the list.

  1. Invoicing Late
  2. Backdating
  3. Distribution Errors including
    1. No distribution
    2. Sent to wrong address or email
    3. Inconsistent distribution (sometimes you mail sometimes you email)
  4. Invoice Identification Errors, including
    1. No invoice number
    2. Duplicate invoice numbers
    3. Difficult invoice numbers
  5. No Terms
  6. No Due Date
  7. Purchase Order Errors
  8. Information Errors
    1. No information
    2. Vague or unclear information
    3. Too little information
    4. Wrong information
  9. Ignoring AP instructions

Cash Application

Another troublesome area where errors lead to late payments. As payments come in, it’s essential they be applied both to the right customers and to the specific customer invoices they relate to. Companies that get this wrong often waste considerable time and resources reissuing invoices and even amending reconciliation reports where their systems can’t “reverse” incorrect cash applications.

Apply customer payments incorrectly and you can easily create a nightmare that can’t be unwound. If you don’t know how or where to post a payment reach out to the customer and ask. Posting to the oldest invoice first is a common practice but often creates more problems than it solves.

But enough with the errors, this is supposed to be an article about best practices and that brings us to Automation – which we discuss below.


A discussion of receivable best practices would not be complete without a discussion of receivable automation.  Technology can play a crucial role. If you or someone in your company has the technical expertise to automate any part of the receivable process, payment process or the collection process – do it! Automation can have a significant impact on your consistency and timeliness getting customer invoices delivered.

Implementing accounts receivable management software or tools can automate tasks, improve efficiency, and reduce the risk of errors.  It can also provide valuable insights into payment patters, overdue invoices, and other key metrics, helping business owners and managers to make informed decisions.

All of that said, setting up the automations can be time-consuming. So, do it, but do one thing at a time. Make sure that one thing is working before starting on the next.

Accounts Receivable Collections

Implement an organized collections process.  An efficient collections process not only helps ensure timely payment but also helps to maintain positive relationships with your customers.

Some key practices to reduce time spent on, and increase effectiveness of, collecting:

  1. Credit management: Establish a credit policy that defines the terms of payment and sets credit limits for customers. Regularly review the credit worthiness of customers to reduce the risk of bad debts.
  2. Accurate billing and invoicing: Ensure that all invoices are accurate, clear, and sent promptly to customers to reduce disputes and delays in payment.
  3. Clearly state your terms on your invoices.
  4. If you assess late fees add a statement to that effect at the bottom of your invoice.   Should you ever end up in court you’re less likely to be awarded late fees if they weren’t stated on the invoice.
  5. Make it easy to pay you, online portals to accept payments is generally expected now.
  6. Timely follow-up: Follow up on overdue invoices promptly and consistently. A friendly reminder can often encourage customers to make payment.
  7. Communication: Maintain open lines of communication with late payers to resolve any issues and keep them informed about their outstanding balances.
  8. Automation: Implement accounts receivable management software or tools to automate tasks, improve efficiency, and reduce the risk of errors.
  9. Record keeping: Keep accurate records of all transactions and regularly reconcile accounts to ensure that all payments are properly accounted for.
  10. Cash forecasting: Regularly forecast cash inflows to help manage cash flow and make informed business decisions.

In conclusion follow best practices for managing accounts receivable to reduce the time spent on collections, and increase your chances of getting paid in a timely manner.

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