Accounts receivables management best practices | 7 tips (2023)

It's not a secret that managing accounts receivables is one of the most important aspects for any company, especially in today's business environment.

What should you focus on to make your accounts receivable management work? What are some best practices? In this article, we will discuss how to improve your accounts receivables management and reduce the risk of generating bad debt.

What is accounts receivables management?

Accounts receivable management (ARM) refers to a range of activities that businesses use to ensure they receive payments for the products and services they provide on time.

It is important to set up accounts receivable management in your business for the following reasons:

  • Ensuring you always get paid on time, minimizing bad debts (receivables), reducing days sales outstanding (DSO) and maximizing cash flow.
  • Avoiding late payment penalties imposed by suppliers or customers.
  • Maximizing working capital, which can improve financial performance through faster collection of revenue and reduced investment tied up in slow-paying invoices.

When it comes to managing accounts receivable, it is important to remember that this process is not just about collecting payments from customers. It is also about maintaining a good relationship with your clients, ensuring that they always have trust in your company.

There are two main aspects of accounts receivable management: the first one is creating and implementing an effective policy, and the second one is following up on invoices regularly.

Outside of these two key pillars, there are also accounts receivable best practices that will increase your chances of success in collecting debts from your customers.

What are the benefits of managing this part of a business?

If you're not trained in accounting, finance, or credit control, it can be easy to underestimate the importance of managing accounts receivable. What's more, managing accounts receivable is a time-consuming activity that requires effort and hard work.

However, if you manage your business finances well from the very beginning (and this includes setting up an effective accounts receivables policy), it will save you both money and stress in the long run.

In addition to making sure customers pay on time and without fail, good accounts receivables management also helps businesses:

  • Prevent profit loss by minimizing bad debts
  • Avoid late payment penalties charged by suppliers
  • Reduce collection costs through early debt recovery processes such as sending out reminders or invoices for overdue amounts
  • Increase customer satisfaction with quick invoice processing times

It's important to note that these benefits can be achieved by any business, regardless of size or industry, and we'll be giving you some easy-to-implement tips on how to manage your accounts receivable.

1. Have an effective accounts receivables policy in place

The key to having successful accounts receivable management is to have a well-defined policy in place. This policy should include all the necessary details about how you expect your clients to pay their invoices, as well as what will happen if they don't comply.

(Video) Best Practices for Managing Accounts Receivable Effectively

A well-defined and effectively communicated accounts receivable - or credit control - policy is essential for any business looking to improve its cash flow.

Accounts receivables management best practices | 7 tips (1)

This policy should cover areas such as credit limits, invoicing procedures, debt collection methods, and dispute resolution processes. By having a written policy in place, your team will be aware of what is expected of them when it comes to managing debtors and collections.

Your accounts receivable policy should also include a late payment fee schedule. This will let your clients know exactly how much they'll be charged if they don't pay their invoice on time, and it can help to motivate them to pay up quickly.

It's also important that you make your customers aware of your accounts receivables policy during the onboarding process and make sure that they explicitly agree to your payment terms and state that in writing. This will give you more leverage if they later claim to be unaware of your payment terms.

2. Don’t wait till your invoices are overdue

One of the worst things you can do is wait until an invoice is overdue before taking action. By that point, it may already be too late to collect the money owed to you.

It's important to be proactive about accounts receivable management, and reach out to clients early on if there are any signs that they may not be able to pay their bill on time. This will give you more options for collections, such as repayment plans or debt recovery services.

It's also important that you are organized and data-led in your approach to tracking debtors effectively and responding to late payments quickly. This will help you to identify any potential problems early on and take steps to mitigate the impact on your business.

Remember, you don't have to wait until an invoice has become overdue in order to start chasing payment. You can always send a polite before due payment reminder to your customers to encourage prompt repayment whilst protecting your relationships

The sooner you start chasing payments, the more likely you are to receive them in full and on time.

It's important to be proactive when it comes to debt collection, as opposed to reactive. This means setting strict credit limits for your customers and actively pursuing payments even before they're overdue.

If you wait until an invoice is overdue, you'll likely face increased costs and a longer payment timeline. In some cases, you may even need to resort to debt recovery services in order to get the money you're owed.

(Video) 8 Tips for managing your accounts receivables

3. Be persistent

It can be frustrating when you're trying to collect money from a client, and they keep putting you off or making excuses. However, it's important to be persistent and continue reaching out until you've received payment. Sometimes it takes multiple attempts before a client finally agrees to pay up.

In order for accounts receivable management to be effective, it's essential that you remain persistent with your debtors. This means continually chasing payments until they are made in full.

The first step is to establish a process for chasing invoices. What you do will depend on the type of business that you have, but if your accounts receivable management is effective it shouldn't be too difficult to get paid by clients.

From there, you'll need to set out a schedule to send reminders. That schedule will be unique to your business, but you can use the one below as a general guide:

  1. Before you send an invoice: Find out who to call in order to understand the procession of your invoice.
  2. Send an electronic invoice as soon as the work is completed.
  3. Email the customer with a polite 'before due' reminder one week before the expiry of your stated payment window.
  4. First reminder: One day after the invoice has become overdue.
  5. Second reminder: One week after the invoice has become overdue and on a weekly basis after this.
  6. Final notice: Four weeks after the invoice was sent

If payment hasn't been received by this stage, then it's time to get tough. You can start by calling your client on the phone and following up those phone calls with an email.

After four weeks, you might want to send a follow-up letter that reinforces the penalty for non-payment. You can also consider turning the matter over to debt collectors. There are some great services out there, like Chaser, who will do all the hard work for you!

4. Set strict credit limits

Credit limits are an important part of accounts receivable management. By setting credit limits for your clients, you can help reduce the risk of overdue payments.

A well-researched set of credit limits is the first line of defense protecting your business from bad actors and delinquent customers.

The downside to setting credit limits is that you may lose some business in the short term from clients who can no longer afford your services. But, as with all things, there is a balancing act at play and it’s important to find the right limit for each client.

Remember, credit limits should also stay fluid and should change in reaction to the credit checks you should be performing on your customers on a regular basis.

5. Be prepared for excuses

When it comes to extracting payment from your customers, you will run into some excuses for non-payment. You may hear:

“We have not been paid yet.”

(Video) 4 Tips for Effective Accounts Receivable Management

“We didn't receive the invoice”

"Your payment terms weren't clear"

"The person who deals with the invoices isn't available"

In most cases, it is important to be persistent and politely remind your customer of the urgency in making payment as soon as possible.

Issues with contacting a specific person can be overcome by building a relationship with the person who greenlights the payment of invoices.

If you have a clear set of payment terms and get your customers to agree to them during the sale, it can be more difficult for them to make excuses.

In some cases, you can offer a small discount for paying immediately or agree on an alternative method of repayment such as monthly installments if that will help them pay sooner rather than later.

6. Set KPIs

KPIs, or key performance indicators, are a great way to measure the success of your accounts receivable management.

Some KPIs you may want to track include:

  • Days sales outstanding (DSO)
  • The percentage of invoices paid within 30 days or less
  • The percentage of invoices paid more than 30 days late
  • The average amount of time it takes to collect an invoice
  • Invoicing accuracy

Having these KPIs in place is important because it allows you to monitor how effective your credit control or accounts receivables processes are and how much impact any changes you make have on that efficiency.

If you find that your DSO is increasing, for example, it may be time to look at tightening up credit limits or being more persistent in chasing payments, for example.

Of course, the better your accounts receivable management is, the less time you will need to spend on it and that means more time available to focus on getting new customers!

(Video) 11 Ways to Better Manage Your Accounts Payables and Accounts Receivables

7. Use debt recovery services where necessary

There may come a time when you need to enlist the help of a debt recovery service. This is usually the last resort, but if you have tried all of the other tips in this article and still haven’t managed to get your money back, then it may be time to call in the professionals.

The first step in choosing a debt recovery specialist is to do your research. There are many companies out there, so you need to find one that is reputable and has a good track record.

Once you have found a few companies that meet your criteria, it’s time to start comparing them.

Make sure you ask questions such as:

  • What services do they offer?
  • What is the average recovery rate?
  • How much will it cost?
  • How will the debt collectors at this agency impact our customer relationships?
  • What is the process for recovering the debt?

By asking these questions, you can make an informed decision about which company is best for you.

We all know how vital building great relationships with your customers is and this is why it’s important to communicate with them and resolve any issues before they escalate.

However, if you do need to use debt collectors, you'll want to ensure you opt for a reliable, friendly debt recovery provider that won’t damage your reputation or client relationships.

Chaser's debt collections team uses mediation and polite persistence instead of harassment and aggression to recover the debt, so you can be sure that your customers won’t receive any nasty surprises.

Make your accounts receivable work for you

Now that we’ve looked at some of the best practices for accounts receivable management, it’s time to put them into action!

Implementing even a few of these tips and accounts receivable best practices will help you get your accounts in order and improve your cash flow.

Managing accounts receivable doesn't have to be hard work, especially with help from Chaser.


What are the 7 tips to improve your accounts receivable collection? ›

How to Improve Your Accounts Receivable Process?
  1. Systemize Invoicing and Payment. ...
  2. Develop a New Collection Strategy. ...
  3. Ensure a Quality Customer Experience. ...
  4. Align Your Team on AR Collection. ...
  5. Prioritize Your Collection Efforts. ...
  6. Offer Discounts and Payment Plans. ...
  7. Use a Collections Agency as a Last Resort.
Oct 5, 2022

What are the 5 strategies for effective accounts receivable management? ›

5 Strategies for Effective Accounts Receivable Collection
  • Accurately track your accounts receivable collection procedures. ...
  • Begin each service arrangement with clear contracts. ...
  • Establish simple processes for invoicing/reminders. ...
  • Reimagine your payment strategy. ...
  • Adopt accounts receivable process automation.
Dec 23, 2020

What are some accounts receivable best practices? ›

Accounts Receivable Best Practices
  • #1 Provide Customers With an Estimate or Quote. ...
  • #2 Confirm Invoices are Sent for Completed Sales Orders. ...
  • #3 Review Accounts Receivables Regularly. ...
  • #4 Offer a Variety of Payment Methods. ...
  • #5 Input Customer Payments Immediately. ...
  • #6 Forecast Recurring Revenue.

What are KPI for accounts receivable? ›

What Are Accounts Receivable KPIs? Accounts receivable KPIs are performance metrics that give insight into how efficiently your business collects and manages cash. Put simply, account receivable KPIs provide a snapshot of how efficiently you're collecting cash owed to you.

How do you reduce days in accounts receivable? ›

How can a business reduce its accounts receivable days?
  1. 1) Implement stricter payment terms. ...
  2. 2) Incentivize early payments. ...
  3. 3) Collect proactively. ...
  4. 4) Make it easy to pay. ...
  5. 5) Automate the accounts receivable process.
May 10, 2022

What are three key indicators in receivables? ›

The most common accounts receivable metrics tend to be day sales outstanding (DSO), average days delinquent (ADD), and bad debt ratio.

What are the key issues in managing accounts receivable? ›

9 accounts receivable management problems and solutions
  • Compiling and tracking information across siloed, legacy systems.
  • Securely accepting electronic payments.
  • Getting paid in a timely manner.
  • Data entry errors and mistakes on invoices.
  • Resolving payment disputes with customers.
  • Inconsistent collections processes.
Nov 18, 2022

What is the most important aspect of managing AR? ›

One of the essential elements of effective AR management are the steps you take to extend credit to your customers. Having a detailed and well-conceived process for approving customer credit will ensure that you are extending credit to reliable customers who are more likely to pay on time.

What are the most important goals of accounts receivable? ›

Maintaining a high standard of data hygiene is one of the most important accounts receivable goals.

What are the 7 key performance indicators? ›

We've defined seven key critical performance indicators to help you go about measuring performance in your team.
  • Engagement. How happy and engaged is the employee? ...
  • Energy. ...
  • Influence. ...
  • Quality. ...
  • People skills. ...
  • Technical ability. ...
  • Results.
Jan 30, 2014

What are the 4 main KPIs? ›

Anyway, the four KPIs that always come out of these workshops are:
  • Customer Satisfaction,
  • Internal Process Quality,
  • Employee Satisfaction, and.
  • Financial Performance Index.
Sep 25, 2013

What are the 5 key performance indicators? ›

What Are the 5 Key Performance Indicators?
  • Revenue growth.
  • Revenue per client.
  • Profit margin.
  • Client retention rate.
  • Customer satisfaction.

What is the most successful collection strategy? ›

One of the most effective collection strategies is to have a robust credit check and onboarding process in place. Ensuring that you do a thorough credit assessment and onboarding while offering goods or services on credit is one of the best strategies to adopt.

What is a good AR turnover ratio? ›

What is a Good Accounts Receivable Turnover Ratio? A good accounts receivable turnover ratio is 7.8. This means that, on average, a company will collect its accounts receivable 7.8 times per year. A higher number is better, since it means the company is collecting its receivables more quickly.

What are three ways to measure accounts receivable performance? ›

There are the standard high level key performance indicators (KPIs) such as Days Sales Outstanding (DSO), Collection Effectiveness Index (CEI), and bad debt to sales ratio - to name a few. However, you also need to be aware of the myriad more granular metrics that can help you better manage your receivables.

What is the formula for accounts receivable? ›

Accounts Receivable Turnover Ratio

It indicates a business's management regarding debt collection. Formula: Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable.

What causes days in AR to increase? ›

Accounts Receivable (A/R) days rise and fall for numerous reasons including: An increase or decrease in case volume. An increase or decrease in net revenue. An increase or decrease in collections.

How can I reduce my collection time? ›

6 ways to reduce your creditor / debtor days

What are the 3 main cost of management of accounts receivable? ›

There are five major costs associated with accounts receivable. They are: bad debts, interest cost, opportunity costs, administrative costs, and miscellaneous costs.

What is a good percentage of AR over 90 days? ›

Hearing from company executives, they are most concerned about the 90+ A/R when that rate is not in the “okay” range (21-30%) or is in fact in the “poor” range (30% or more). The most important thing to understand is what is causing an increase in the balance.

How do you organize accounts receivable department? ›

How to set up your Accounts Receivable Department
  1. Measurable and strategic goals.
  2. Responsibilities of the accounts receivable staff.
  3. Invoice management practices and schedules.
  4. Credit evaluation procedures.
  5. Collections procedures including when to contact clients and when to write off the debt.
Sep 10, 2018

What is often the most critical part of managing receivables? ›

What is often the most critical part of managing receivables? dividing net credit sales by average net accounts receivable.

What is the best metric for accounts receivable? ›

DSO is the most commonly tracked KPI for Accounts Receivable — and for good reason. By determining the average number of days it takes to collect payments, you can monitor cash flow at an individual customer and organizational level.

What are the 2 objectives of accounts receivable management? ›

Key Takeaways. The main purpose of accounts receivable management in your business is to maximize your cash flow while minimizing costs and maintaining good client relationships. Moving to electronic billing and payments is a vital step to streamline customer payments.

What are the 5 smart goals examples? ›

Examples of SMART Goals
  • Studying. Simple Goal: I need to study more. ...
  • Writing. Simple Goal: ...
  • Reading More Books. Simple Goal: ...
  • Mastering Emotions. Simple Goal: ...
  • Exercising More. Simple Goal: ...
  • Improving Your Diet. Simple Goal: ...
  • Becoming More Productive. Simple Goal: ...
  • Time Management. Simple Goal:
Oct 14, 2022

What are smart objectives for accounts receivable? ›

Setting SMART (Specific, Measurable, Achievable, Relevant, Time-bound) performance goals for accounts receivable can help you optimise your process and reduce the time it takes for your customers to pay you.

What are the 3 key strategies when it comes to collections? ›

Communication, choice, and control.

What are the key strategies when it comes to collections? ›

Debt collection strategies include reviewing your invoicing and billing processes, hiring accountants, and understanding your clients' payment processes. You should only hire a collection agency for debts 90 days past due from unresponsive or resistant clients.

How can I improve my collection cycle? ›

13 Strategies to Speed up Collections
  1. Update your A/R management software. ...
  2. Reevaluate your lockbox placement. ...
  3. Review your policy regarding billing dates and procedures. ...
  4. Review the technology your company is utilizing to interact with customers. ...
  5. Discuss your terms with your buyer at the time of sale.

What are 6 strategies to pay off debt? ›

How to Pay Off Debt Faster
  • Pay more than the minimum. ...
  • Pay more than once a month. ...
  • Pay off your most expensive loan first. ...
  • Consider the snowball method of paying off debt. ...
  • Keep track of bills and pay them in less time. ...
  • Shorten the length of your loan. ...
  • Consolidate multiple debts.

What are 3 ways to keep debt down? ›

Tips to Reduce Your Debt
  • Develop a budget to track your expenses. ...
  • Don't take on more debt. ...
  • Pay your bills in full and on time. ...
  • Check your bills carefully. ...
  • Pay off your high-interest debts first. ...
  • Reduce the number of credit cards you have. ...
  • Look for the best interest rates when consolidating your debts.

What tactics do debt collectors use? ›

  • Making Threats. Debt collectors sometimes use threats to pressure people into paying a debt. ...
  • Calling Neighbors and Family Members. ...
  • Pretending to Be a Debt Collector. ...
  • Making Harassing Phone Calls. ...
  • Calling When You're Represented by an Attorney.

What is collection tactics? ›

A collection strategy sets a standard for how accounts receivable collections will be conducted. When will you be sending out first invoices? How often will you get in contact with your customers? Are you making follow up phone calls? If there is no order, then customers will fall through the cracks.

How do you solve collection problems? ›

  1. SET CREDIT AND COLLECTIONS MANAGEMENT POLICIES. Your accounting team should have general policies in place to ensure that invoices are going out correctly. ...

What are some common collection terms? ›

Here's a glossary of the most common collections terms you can expect to encounter.
  • Accounts Receivable. Money owed for products or services that were provided in advance of payment, or “on credit” as it may be referred to.
  • Aging Report. ...
  • Bad Debt. ...
  • Collection Agency. ...
  • Contingency Fee. ...
  • Credit Bureau. ...
  • Creditor. ...
  • Debtor.
Oct 29, 2021

What are proactive collection strategies? ›

What are the key strategies involved in proactive collection management? Proactive collections focus on leveraging technology to predict invoice payment dates, identify at-risk customers, and generate prioritized worklists. This helps transform collections into a data-driven process.

How do you calculate cash collected from accounts receivable? ›

Expected cash collections = cash sales + projected collections from accounts receivable
  1. 55% of their receivables were paid within 30 days.
  2. 1% of their receivables were paid within 30 to 60 days.
  3. 2% of their receivables were paid within 60 to 90 days, and.
  4. 42% of their receivables were paid after over 90 days.
Feb 8, 2022


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