Accounts Receivable Process: From Invoice to Cash

Many growing companies treat AR as an afterthought. They focus on making the sale, then hope payment arrives. That's backwards—the AR process should be designed to make payment easy and inevitable.

The best AR processes make getting paid the natural outcome of good communication and easy payment options, not the result of aggressive collection efforts.

The Complete AR Workflow

Step 1: Credit Assessment

Before extending credit, assess the customer's ability to pay:

• New customers: Credit check, references, initial credit limit
• Large orders: Review credit limit before accepting
• Existing customers: Periodic review of payment history and updated credit
• Risk indicators: Late payments, industry distress, financial news

Step 2: Invoice Generation

Invoice promptly and accurately:

• Timing: Invoice immediately upon delivery/service—don't wait
• Accuracy: Invoice must match quote/contract exactly
• Completeness: Include all required information (PO number, project codes)
• Clarity: Clear description of what's being billed

Step 3: Invoice Delivery

Get the invoice to the right person:

• Right contact: AP department or designated billing contact, not your sales contact
• Right format: Some customers require specific formats or portals
• Confirmation: Confirm receipt, especially for large invoices
• Documentation: Track when and how invoice was sent

Step 4: Payment Facilitation

Make payment easy:

• Multiple options: ACH, credit card, check—customer's preference
• Clear instructions: How to pay prominently displayed
• Payment portal: Self-service payment option
• Auto-pay: Offer for recurring relationships

Step 5: Follow-Up and Reminders

Systematic communication keeps you top of mind:

• Pre-due reminder: Friendly reminder 5-7 days before due date
• Due date reminder: Note that payment is due today
• Past-due reminders: Escalating sequence (see Collections section)

Step 6: Cash Application

Match payments to invoices:

• Auto-match: System matches payments to invoices by reference number
• Manual matching: For payments without clear reference
• Partial payments: Apply correctly and track remainder
• Discrepancies: Investigate and resolve mismatches quickly

Step 7: Dispute Resolution

• Prompt response: Address billing questions immediately
• Documentation: Record dispute details and resolution
• Credit memos: Issue adjustments quickly when warranted
• Process improvement: Track disputes to fix root causes

Invoicing Best Practices

Invoice Content

Every invoice should include:

• Your company info: Name, address, contact
• Customer info: Bill-to name and address
• Invoice number: Unique, sequential identifier
• Invoice date: When invoice was issued
• Due date: When payment is expected (prominent!)
• Payment terms: Net 30, etc.
• Line items: What you're billing for
• Amount due: Total clearly displayed
• Payment instructions: How to pay
• Reference numbers: PO, project codes if required

Invoice Timing

• Products: Invoice upon shipment
• Services: Invoice upon completion or milestone
• Recurring: Invoice at start of billing period (not end)
• Projects: Invoice per contract terms (milestone or periodic)

Payment Terms

Common Terms

• Net 30: Payment due 30 days from invoice date (most common)
• Net 15: For smaller customers or faster-cycle industries
• Net 45/60: For large customers with negotiating power
• Due on receipt: Payment expected immediately
• 2/10 Net 30: 2% discount if paid within 10 days

Setting Terms

• Industry standard: Know what's normal in your industry
• Customer size: Larger customers often expect longer terms
• Relationship: New customers might get shorter terms initially
• Risk: Higher-risk customers get shorter terms or payment upfront

Terms Negotiation

When customers request longer terms:

• Understand why: Cash flow, AP processing time, policy?
• Trade value: Longer terms for something in return (volume, contract length)
• Partial accommodation: Net 45 instead of Net 60
• Discounts: Offer early payment discount as alternative

Collection Cadence

A systematic collection process gets results without damaging relationships.

Sample Collection Sequence (Net 30 Terms)

Communication Principles

• Professional: Never angry or accusatory
• Persistent: Consistent follow-up shows you're serious
• Solution-oriented: Ask if there's an issue you can help resolve
• Documented: Record every communication

Customer Credit Management

Credit Limits

• Initial limit: Based on credit check, order size, industry norms
• Monitoring: Alert when customer approaches limit
• Increases: Based on payment history and relationship
• Enforcement: Hold orders when limit exceeded

Credit Holds

When to put a customer on credit hold:

• Invoices significantly past due (e.g., 60+ days)
• Credit limit exceeded
• Financial distress signals (news, bounced payments)
• Failed payment attempts

Handling Problem Customers

• Discuss early: Talk to customer at first sign of trouble
• Payment plans: Structure payments if customer is willing
• Reduced credit: Tighten limits rather than cut off entirely
• COD/prepayment: Require upfront payment for continuing business

AR Metrics

Key Metrics to Track

• DSO (Days Sales Outstanding): Average days to collect; primary AR metric
• Aging distribution: % of AR in each aging bucket (current, 30, 60, 90+)
• Collection effectiveness index: Actual collections vs. beginning AR + sales
• Bad debt %: Write-offs as percentage of sales
• Disputes %: Invoice disputes as percentage of volume

DSO Calculation

Benchmarks

• DSO: Should be close to your average terms (if Net 30, DSO should be ~30-35)
• 90+ days AR: Should be <5% of total AR
• Bad debt: Should be <1% of revenue for most B2B

Building Efficient AR Operations

Automation Priorities

• Invoice generation: Auto-generate from sales system or time tracking
• Invoice delivery: Electronic delivery with confirmation
• Payment processing: Online payment portal
• Reminders: Automated dunning sequences
• Cash application: Auto-match payments to invoices

Process Optimization

• Reduce invoice errors: Fewer disputes = faster payment
• Streamline approvals: Get invoices out faster
• Simplify payment: Multiple options, clear instructions
• Standardize follow-up: Consistent collection cadence