This guide breaks down the accounts receivable process from the moment credit terms are agreed to the point payment is received, recorded, and followed up when it is late. It explains what accounts receivable is, why a consistent workflow matters for cash planning, and how the standard AR steps fit together in real teams. You will also find practical examples, the main AR KPIs such as DSO and receivables turnover, common problems like late payments and disputes, and a set of working practices for invoicing, reminders, reconciliation, and overdue accounts. The later sections compare traditional and modern approaches and outline where automation and payment tools tend to make a measurable difference.
Money tied up in unpaid invoices is one of the quickest ways for an otherwise healthy company to feel short on cash. The issue is rarely a single late payer. More often it is a chain of small gaps: unclear terms, invoices sent late, missing purchase order details, weak follow ups, slow dispute handling, or payments that arrive but are not applied correctly. Over time, those gaps distort cash forecasts, create extra work for finance teams, and put unnecessary pressure on customer relationships.
A solid accounts receivable workflow makes responsibilities clear, sets a predictable rhythm for billing and follow up, and gives leadership a realistic view of what will be collected and when.
What is accounts receivable?
Accounts receivable (AR) refers to the unpaid invoices a business has issued to customers for goods or services delivered on credit.
It represents money the company has earned but not yet collected, and is recorded as a current asset on the balance sheet because it is expected to be converted into cash within a defined period, most commonly 30 to 90 days.
In practical terms, accounts receivable reflects the gap between providing value to a customer and receiving payment for it. The size and ageing of receivables directly affect working capital, short-term liquidity, and the reliability of cash flow forecasts. For many companies, AR makes up a significant share of total assets, which is why how receivables are tracked and collected matters as much as how sales are made.
Accounts receivable is often confused with accounts payable, but the two represent opposite sides of the same process. Receivables show money owed to the business by customers, while payables show money the business owes to suppliers and vendors. Both must be managed together to keep financial records accurate and cash movement predictable.
What is the accounts receivable process?
The accounts receivable process is the set of steps a business follows to invoice customers, track unpaid balances, and collect payment after a sale is made on credit.
It begins once credit terms are agreed and an invoice is issued, and ends when the payment is received, applied to the correct invoice, and recorded in the accounting system.
In practice, the AR process functions as a cycle rather than a single action. It covers credit approval, invoice creation, payment monitoring, follow-ups on overdue balances, and the handling of disputes or adjustments. Each stage affects how quickly invoiced revenue turns into cash and how accurately receivables are reflected in financial records.
The process involves more than one team. Sales initiates transactions and agrees payment terms, finance manages invoicing, collections, and reconciliation, while customer service resolves billing questions that could delay payment. When these responsibilities are unclear or poorly coordinated, delays and errors tend to compound across the cycle.
Modern accounts receivable processes rely less on manual tracking and more on system-based workflows. Accounting and billing systems are commonly used to issue invoices, monitor ageing, apply payments, and maintain a clear audit trail.
Further Reading: E-Invoicing for Companies: How to Stay Compliant and Improve Control
The 9 accounts receivable process steps
The accounts receivable process follows a defined sequence from the moment credit is granted to the point an invoice is settled or classified as overdue. Each step establishes a control point in the movement from invoicing to cash collection.
1. Credit application and approval
Before offering credit, the business evaluates the customer’s ability to pay. This step includes collecting financial information, reviewing payment history or references, and assigning internal credit limits or terms. The process ends with a credit decision recorded in the customer account.
2. Setting payment terms
Once credit is approved, payment terms are formally agreed. These terms define due dates, accepted payment methods, and any conditions related to early payment or late settlement. The agreed terms become the reference point for invoicing and follow-up.
3. Delivery of goods or services
The receivable is created once goods are delivered or services are performed. Delivery confirmation or service completion records link the transaction to the future invoice and establish the basis for billing.
4. Invoice creation and issue
An invoice is generated and sent to the customer using the agreed terms. It specifies what was delivered, the amount due, the due date, and payment instructions. The invoice date marks the start of the receivables ageing timeline.
5. Recording the receivable
The issued invoice is recorded in the accounting system as an open receivable. This entry links the customer, invoice amount, due date, and ledger account, forming part of the receivables balance.
6. Monitoring outstanding invoices
Open invoices are reviewed through ageing reports that group receivables by time outstanding, in line with how trade receivables are monitored and assessed under IFRS 9 Financial Instruments. This step focuses on identifying invoices approaching or exceeding their due date based on recorded payment terms.
7. Payment reminders and follow-up
When an invoice nears or passes its due date, follow-up actions are triggered. These may include reminder notices or direct contact, based on internal collection rules tied to ageing categories.
8. Payment receipt and application
Incoming payments are matched to the relevant invoices and recorded in the accounting system. Partial payments, short payments, or overpayments are applied according to internal allocation rules.
9. Overdue account handling
Invoices that remain unpaid beyond defined thresholds move into an overdue status. At this stage, collection actions follow documented procedures, which may include escalation steps, payment arrangements, or write-off assessment.
Examples of real-world accounts receivable
Accounts receivable appears in different forms depending on how goods or services are sold and billed. The underlying process remains the same, but the documents, timing, and counterparties involved vary by industry.
- Manufacturing.A manufacturing company sells industrial equipment to a business customer under net-30 payment terms. Once the equipment is delivered and an invoice is issued, the invoiced amount is recorded as accounts receivable. The receivable remains open until payment is received and applied, or until adjustments such as credit notes are issued.
- Professional services.A service provider, such as a marketing or consulting agency, bills clients on a recurring basis for work performed during a fixed period. Each issued invoice creates a new receivable that stays open until the client settles it. Invoices may overlap across periods, resulting in multiple open receivables for the same customer at the same time.
- Subscription-based businesses.In subscription models, receivables are created at regular billing intervals for continued access to a product or service. Each billing cycle generates an invoice that enters the receivables ledger independently, even though the underlying customer relationship is ongoing.
- Healthcare and insurance-based billing.Healthcare providers often bill third-party payers rather than the end customer directly. In these cases, receivables are created when claims are submitted to insurers. Payments may be partial, delayed, or denied, requiring follow-up actions and adjustments before the receivable is settled or written down.
Q&A: When does an invoice become accounts receivable?
An invoice becomes accounts receivable once it is issued to the customer after goods are delivered or services are performed. From that point, the invoiced amount is recorded as an open receivable in the accounting system and remains there until payment is received, adjusted, or written off according to internal rules.
What are accounts receivable performance indicators?
Accounts receivable performance indicators are calculated from invoicing and payment data to track collection timing, receivables turnover, and uncollectible balances.
| Indicator | What it measures | How it’s calculated | Data used | Does not include |
| Days sales outstanding (DSO) | Average time between invoicing and payment | (Average accounts receivable ÷ net credit sales) × number of days | Invoices issued on credit and received payments | Cash sales, unbilled revenue |
| Accounts receivable turnover ratio | Frequency with which receivables are converted into cash | Net credit sales ÷ average accounts receivable | Credit sales and receivables ledger balances | Cash transactions |
| Bad debt ratio | Portion of receivables recognised as uncollectible | Bad debt expense ÷ total credit sales or total AR | Write-offs recorded in the ledger | Overdue but still open invoices |
Accounts Receivable challenges: 5 most common issues
Despite best efforts, businesses frequently encounter challenges in managing AR processes. Understanding these common obstacles helps develop strategies to overcome them.
- Late payments. Perhaps the most universal challenge, late payments disrupt cash flow and require additional resources for follow-up and collections. Factors contributing to payment delays include economic conditions, customer financial difficulties, and simple oversight. Addressing this issue often requires a combination of clearer payment terms, easier payment options, and systematic follow-up procedures.
- Disputes and discrepancies. Disagreements over invoice amounts, service quality, or contract terms can significantly delay payment processing. Establishing clear documentation protocols and responsive dispute resolution procedures helps minimise the impact of these situations on cash flow.
- Inefficient manual processes. Many businesses still rely on manual methods for invoice creation, distribution, and payment application. These labor-intensive processes increase the risk of human error and delay the collections process. Automating routine tasks through accounting software and dedicated accounts receivable systems can dramatically improve efficiency.
- Poor communication. Miscommunication between departments often leads to billing errors or collection problems. For example, if the sales team promises custom payment terms without informing the finance team, invoices may be generated with incorrect information. Establishing clear internal communication channels helps prevent these issues.
- Insufficient credit policies. Weak credit evaluation procedures can lead to extending credit to high-risk clients, increasing the likelihood of bad debt. Developing comprehensive credit application processes and regularly reviewing credit policies helps minimise this risk while still supporting sales growth.
Further Reading: Invoice Factoring vs. Invoice Discounting: What’s the Difference?
Best practices for accounts receivable
Accounts receivable best practices describe how credit, invoicing, collections, and reconciliation are structured and executed within a controlled billing environment. These practices define how receivables are created, monitored, and closed in a consistent manner.
Credit policy definition
Credit terms are set using documented criteria rather than individual judgment. Customer limits, payment terms, and approval thresholds are recorded and applied uniformly across accounts. Changes to credit terms are documented and reviewed on a scheduled basis.
Invoice issuance standards
Invoices are issued using a standard format and delivery method. Each invoice includes reference information such as purchase order numbers, service periods or delivery details, due dates, and payment instructions. Invoice records remain linked to the underlying transaction throughout the receivables lifecycle.
Payment method handling
Accepted payment methods are defined in advance and supported through the billing or accounting system. Each payment method follows a consistent posting and reconciliation process once funds are received.
Collections workflow
Follow-up actions are triggered by invoice status and ageing rather than ad-hoc decisions. Reminder schedules, escalation thresholds, and contact methods are documented and applied consistently to overdue invoices.
Receivables reconciliation
Open receivables are reconciled against the general ledger on a recurring basis. This process compares invoice balances, payment applications, and adjustments to confirm that receivables reported in financial statements match underlying transaction records.
Q&A: Are accounts receivable best practices the same for all businesses?
Accounts receivable best practices follow the same control principles across industries, but their implementation varies by billing model, transaction volume, and customer type. Credit rules, invoicing frequency, reminder schedules, and reconciliation cycles are usually adjusted to match how and when customers are billed, rather than applied as a single uniform setup.
