Best Practices for Handling Accounts Receivable

Effective management of accounts receivable (AR) is crucial for maintaining a healthy cash flow and ensuring the financial stability of a business. Accounts receivable represent money owed to a company by its customers for goods or services delivered. Poor AR management can lead to cash flow issues, increased bad debt, and strained customer relationships. Below are nine best practices to optimize your accounts receivable process and improve overall financial performance.

Establish Clear Credit Policies

Before extending credit to customers, develop a well-defined credit policy. This policy should outline criteria for evaluating customer creditworthiness, such as credit scores, payment history, and financial stability. Clearly communicate credit terms (e.g., “Net 30” for payment due within 30 days) to customers upfront to avoid misunderstandings. Regularly review and update the policy to reflect changes in market conditions or business needs. Define late fees.

Streamline Invoicing Processes

Accurate and timely invoicing is essential for efficient AR management. Ensure invoices are clear, detailed, and include all necessary information, such as:

Invoice number and date
Customer details
Description of goods or services
Payment terms and due date
Accepted payment methods
Send invoices promptly after a sale and consider using electronic invoicing systems to reduce errors and speed up delivery.

Automate Accounts Receivable Processes

Leverage accounting software or AR automation tools to streamline repetitive tasks like invoicing, payment tracking, and follow-ups. Automation reduces manual errors, saves time, and provides real-time insights into outstanding invoices. Many tools can integrate with payment gateways to simplify collections.

Monitor Accounts Receivable Regularly

Track key AR metrics, such as Days Sales Outstanding (DSO), aging reports, and collection rates, to identify potential issues early. An aging report categorizes receivables by how long they’ve been outstanding (e.g., 0–30 days, 31–60 days). Regular monitoring helps prioritize collections efforts and detect customers who consistently pay late.

Communicate Proactively with Customers

Maintain open lines of communication with customers to ensure timely payments. Send payment reminders before invoices are due and follow up promptly on overdue accounts. Personalized communication, such as phone calls or tailored emails, can be more effective than automated messages for overdue payments. Building strong relationships with customers can also encourage prompt payment. Start off a phone call with a question about the service, not the payment. This goes a long way to ensuring the customer is satisfied and will pay.

Offer Flexible Payment Options

Make it easy for customers to pay by offering multiple payment methods, such as credit cards and bank transfers (ACH). Consider offering early payment discounts (e.g., 2% off if paid within 10 days) to incentivize faster payments. Flexible options reduce friction and improve collection rates.

Implement a Collections Strategy

For overdue accounts, have a structured collections process in place. Start with polite reminders, escalate to firmer notices, and, if necessary, involve a collections agency as a last resort. Train staff to handle collections professionally to maintain customer goodwill while recovering owed amounts. Document all communications for reference. If you are selling multiple products or services to a customer, consider delaying delivery of new products or services until all past due balances have been paid.

Regularly Review Customer Credit Limits

Periodically reassess customer credit limits based on their payment history and financial health. If a customer consistently pays on time, you might increase their credit limit to encourage more business. Conversely, reduce limits or switch to cash-on-delivery terms for customers with frequent late payments to minimize risk.

Train Your Team and Maintain Accurate Records

Ensure your AR team is well-trained in best practices and customer service. Accurate record-keeping is critical for tracking invoices, payments, and disputes. Use a centralized system to store all AR-related data, ensuring easy access and compliance with accounting standards. Regular audits of AR records can help identify discrepancies and improve processes.

Conclusion

Effective accounts receivable management is a cornerstone of financial success. At Wendy P. Corp we make your accounts receivable process streamlined and flowing. Our staff are professionals at communicating with your customers to get them to pay; that starts with establishing good relationships and communicating with them regularly. We have helped many businesses clean up their accounts receivable and we can help you too.