Accounts receivable process: The end-to-end playbook for finance teams

In the talks with finance experts and collections managers, we’ve understood that the problem with the AR process isn’t a lack of a step-by-step view of the operation. 

It’s the uncertainty that variations across departments, business models, and industry verticals can create a spiral of data silos and dispute backlogs that marginally extend DSO.  

A slight change in a subscription business’s proration calculations can create a minefield where one wrong move triggers disputes that delay cash for weeks.

Besides that, the payment landscape has changed, while old habits die hard. 

• The UK VAT digitization requirements
• Buyer portal mandates from enterprise customers 
• Evolving payment behaviors 

These changes have changed what "good" accounts receivable looks like. 

But most teams are too swamped with time-consuming manual processes, creating compliance risks and cash flow volatility.

This playbook cuts through the noise, refreshing the fundamentals while addressing today's realities: 

• The factors that make your receivables process more complex today, and how to overcome them
• The key signs of a well-run accounts receivable process
• How to review and audit your AR process for inefficiencies 

Whether you're fixing broken processes or optimiz functional ones, this guide provides the practical framework you need to make your receivables predictable, trackable, and firmly under control.

What is the accounts receivable process (and why it matters)?

The AR process encompasses everything from the moment you extend credit to a customer through to the final collection of payment. But in today's business environment, it's far more complex than simply sending invoices and waiting for cheques.

Within the broader Order-to-Cash (O2C) cycle, the receivables process typically begins after order fulfillment and extends through billing, collections, dispute resolution, cash application, and reporting. 

The process touches every department: 

1. Sales sets the commercial terms 
2. Operations provides proof of delivery
3. Customer service handles queries
4. Finance manages the financial controls

This cross-functional nature makes accounts receivable both critical and vulnerable. A breakdown in any handoff can cascade into cash flow problems.

Given recent changes, the stakes have never been higher. The UK Federation of Small Businesses reports that late payments close approximately 50,000 UK businesses (FSB) annually and cost the economy £2.5 billion GBP. 

For mid-market organisations, AR inefficiencies create compounding problems:

• Extended cash conversion cycles constrain growth investments
• Aged receivables inflate bad debt provisions
• Poor collection practices damage customer relationships that took years to build

The key steps of the accounts receivable process 

Each stage of the process presents unique challenges and opportunities for improvement. Understanding these core steps is the first stride towards shortening DSO.

1. Customer onboarding and credit assessment

Customer onboarding sets the foundation for everything that follows. The onboarding process involves: 

• Conducting credit checks
• Setting appropriate credit limits
• Capturing accurate legal entities and VAT registration numbers

That way, you can distinguish good and bad payers and establish payment terms that align with both customer expectations and your cash flow requirements.

Additionally, your assessment should also involve asking questions that reveal key information, like: 

• What info they need to be able to make a payment on invoices?
• Who you should speak to in order to settle the invoice payment?
• When they make payment runs
• The customer’s business details for invoicing purposes

A positive customer response to those key questions makes any future invoice chasing as effective and efficient as possible.  

Otherwise, weak credit controls at onboarding cascade through every subsequent stage. Over-generous limits lead to aged balances and write-offs; under-conservative limits constrain sales growth and customer relationships.

 2. Invoicing

Once goods or services are delivered, accurate and timely invoicing is paramount. This step includes generating the invoice, ensuring it contains all necessary details, and delivering it to the customer.

• Unique invoice number: A distinct identifier for each invoice.
• Issue date: The date the invoice was generated.
• Payment due date: The date by which payment is expected.
• Seller's information: Full legal name, address, and contact details of the business issuing the invoice.
• Buyer's information: Full legal name, address, and contact details of the customer.
• Description of goods/services: A clear and detailed breakdown of what was provided.
• Quantity and unit price: For each item, the quantity provided and its price per unit.
• Subtotal: The total amount before any taxes or discounts.
• Taxes: Any applicable taxes, clearly itemized.
• Discounts: Any discounts applied.
• Total amount due: The final amount the customer needs to pay.
• Payment terms: Details on how and when payment should be made (e.g., bank transfer details, payment methods accepted).

Common issues here include incorrect billing, delayed invoice delivery, or unclear payment terms, all of which can lead to payment delays and customer disputes. This results in an extended DSO and a heavier administrative load.

3. Tracking

Account receivables tracking involves monitoring due dates, identifying overdue accounts, and understanding payment patterns. A lack of robust tracking can cause lost invoices, missed follow-ups, and a general lack of visibility into AR health, leading to significant cash flow gaps.

This leads to a reduction in revenue and an increase in collection expenditures.

Robust invoice tracking efforts include:

• Clear visibility into outstanding invoices and their status
• Categorization of overdue accounts by age and amount
• Detailed payment history for each customer
• Integration with accounting and CRM systems
  
  

4. Collection

This step focuses on actively pursuing payments from customers. It includes account receivable best practices such as sending reminders, making calls, and escalating delinquent accounts when necessary.

Inefficient collection processes often involve inconsistent follow-ups or a lack of clear escalation procedures, leading to prolonged payment cycles and potential write-offs. This leads to a higher DSO and more bad debt.

5. Reconciliation

Reconciliation in accounts receivable involves matching incoming payments with outstanding invoices and accurately updating customer accounts to reflect the new balance and payment status.

This ensures that records are up-to-date and discrepancies are resolved promptly. Reconciliation errors can lead to misapplied payments, incorrect customer balances, and confusion, which can frustrate customers and complicate future transactions.

This translates into inaccurate financial reporting and time wasted correcting errors.

Common account receivable challenges and risks for finance teams

The accounts receivable process, while fundamental, is fraught with challenges and risks that can significantly impact a company's financial health. 

Manual processes and human error

One of the most pervasive challenges is the reliance on manual processes. From invoice generation to payment tracking and reconciliation, manual handling introduces several risks:

• Data entry errors: Typos in invoice amounts, customer details, or payment terms can lead to disputes and delays.
  
  
• Missed follow-ups: Without automated reminders, overdue invoices can easily be overlooked, extending DSO.
  
  
• Inefficient cash application: Manually matching payments to invoices is time-consuming and prone to misapplication, leading to reconciliation issues.
  
  
• Lack of scalability: Manual processes struggle to keep pace with business growth, creating bottlenecks and increasing administrative costs.
  
  

Bad debt and write-offs

The ultimate risk in AR is the inability to collect payment, resulting in bad debt. This not only directly reduces revenue but also impacts profitability and future lending opportunities. Causes include:

• Customer insolvency: A customer's financial distress can make collection impossible.
  
  
• Aging receivables: The longer an invoice remains unpaid, the less likely it is to be collected.
  
  
• Lack of legal recourse: Insufficient documentation or credit agreements can limit options for recovery.
  
  

Customer relationship impact

Aggressive or poorly managed collection efforts can damage valuable customer relationships, leading to churn. Conversely, an overly passive approach can encourage late payments. Striking the right balance is crucial.

Compliance and regulatory risks

Finance teams must also contend with an evolving regulatory landscape. Non-compliance with invoicing standards, data protection laws (like GDPR), or specific industry regulations can result in fines and reputational damage.

Lack of visibility and reporting

Without clear visibility into the AR pipeline, finance teams cannot accurately forecast cash flow, identify trends, or pinpoint areas of inefficiency. This hinders strategic decision-making and makes it difficult to measure the effectiveness of AR processes.

How to improve your accounts receivable process 

Improving your accounts receivable process is not just about optimiz a back-office function; it's about fortifying your organisation's financial foundation. This means moving beyond reactive collections to proactive cash flow management and strategic efficiency.

Understanding the potential impact of AR automation on your DSO and overall cash flow is crucial.

To help you visualize these benefits, Chaser offers an ROI calculator designed to consider your current AR metrics and demonstrate how implementing modern AR automation solutions can lead to tangible financial gains.

Conduct a comprehensive AR audit

Begin by systematically reviewing your current AR process from end to end. This audit should uncover bottlenecks, identify areas of high manual effort, and pinpoint sources of payment delays and disputes.

• Map the current state: Document every step, from credit assessment to cash application, noting who is responsible for each task and which systems are involved.
  
  
• Analyse key metrics: Evaluate DSO, average payment terms, bad debt write-offs, and the cost of collections. Compare these against industry benchmarks.
  
  
• Gather stakeholder feedback: Interview sales, operations, customer service, and finance teams to understand their challenges and identify inter-departmental friction points.
  
  
• Review credit policies: Assess the effectiveness of your credit assessment criteria and payment terms in managing risk and supporting sales.
  
  

Refine credit and invoicing policies

Strong credit and clear invoicing are the first lines of defence against late payments.

• Standardize credit assessment: Implement consistent and robust credit checks for new and existing customers, setting credit limits that align with their financial health and payment history.
  
  
• Optimize payment terms: Offer clear, concise payment terms that are communicated upfront and regularly reviewed for effectiveness. Consider early payment discounts for strong incentives.
  
  
• Enhance invoice accuracy and clarity: Ensure invoices are complete, accurate, and easy to understand. Include all necessary details, such as unique invoice numbers, clear payment due dates, seller and buyer information, and itemized goods/services.
  
  Adhere to all relevant regulatory requirements (e.g., HMRC's conditional elements for UK VAT).
  
  
• Timely invoice delivery: Ensure invoices are sent promptly after goods or services are delivered, using preferred customer delivery methods.
  
  

Automate the process with AR software

Investing in accounts receivable automation software is a transformative step for finance teams, shifting from manual, reactive tasks to strategic, proactive cash flow management.

• Automated chasing and reminders: Implement software that automatically sends customized payment reminders based on predefined schedules, freeing up your team from repetitive manual follow-ups.
  
  
• Streamlined cash application: Utilize AI-powered tools that automatically match incoming payments to outstanding invoices, even for complex scenarios like partial or consolidated payments, significantly reducing reconciliation time and errors.
  
  
• Real-time visibility and reporting: Leverage dashboards and analytics to gain instant insights into your AR pipeline, DSO, and payment trends, enabling better forecasting and strategic decision-making.
  
  
• Centralized dispute management: Use the software to track, manage, and resolve payment disputes efficiently, ensuring clear communication and faster resolution.
  
  
• Customer payment portals: Provide secure, self-service portals where customers can view invoices, check their account status, and make payments, improving the customer experience and accelerating collections.

Strengthen inter-departmental collaboration

Given AR's cross-functional nature, seamless collaboration is vital.

• Regular syncs: Establish routine meetings between finance, sales, and operations to discuss customer payment behavior, address potential disputes early, and align on credit policies.
  
  
• Shared information: Ensure that relevant customer information, credit terms, and delivery confirmations are accessible across departments.
  
  
• Customer service training: Equip customer service teams to handle initial payment queries effectively, escalating only when necessary.
  
  

Continuous monitoring and adaptation

The AR landscape is dynamic. Regular review and adaptation are critical to sustained improvement.

• Monitor key performance indicators (KPIs): Continuously track metrics like DSO, average time to collect, and collection effectiveness.
  
  
• Feedback loops: Implement mechanisms for customer feedback on the invoicing and payment process.
  
  
• Stay updated on regulations: Keep abreast of changes in payment regulations, tax requirements, and data protection laws.

Accounts receivable process examples

The accounts receivable process varies significantly across industries, each presenting unique challenges and requiring tailored approaches. Understanding these differences is key to optimizing cash flow and ensuring financial health, regardless of your sector.

Service business: Managing billable hours and client expectations

Service businesses like consulting firms or marketing agencies typically work with project-based billing, retainers, or milestone payments. Invoicing occurs upon project completion or at agreed-upon intervals.

Accurately tracking billable hours and deliverables becomes critical when project scope changes mid-stream.

You'll need systems that capture time spent while managing client expectations around payment terms—especially for longer engagements where trust and transparency drive timely payment.

Manufacturing: Reconciling complex orders at scale

Manufacturing companies handle large order volumes with extended payment terms—often 60 to 90 days. This means managing purchase orders, shipping documentation, and installment payments across multiple clients simultaneously.

With invoices containing dozens of line items, reconciliation becomes time-intensive. Returns or disputes compound this complexity, creating delays that ripple through your cash flow forecasting.

Education: Balancing flexibility with accountability

Universities and private schools manage student tuition, fees, and grants on a cyclical schedule aligned with academic terms. Payment plans and financial aid applications are standard practice.

But pursuing delinquent accounts requires a delicate approach. You're dealing with individual students and their families, not corporate entities.

Maintaining firm payment policies while preserving relationships takes careful communication and often, significant administrative effort.

Charities and not-for-profit: Turning pledges into received funds

AR for charities centers on tracking pledges, donations, and grants rather than traditional sales transactions. Donor relationship management directly impacts whether committed funds arrive on schedule.

Securing promised donations requires consistent follow-up, while grants demand detailed reporting and strict adherence to fund allocation restrictions.

Missing these requirements can jeopardize both current funding and future opportunities.

Accounts receivable process KPIs (how to know if your process works)

Understanding how well your accounts receivable process performs is vital for financial health. KPIs offer objective insights into efficiency and potential issues.

Days Sales Outstanding (DSO)

DSO is a common metric, but it means little in isolation. A high DSO might be acceptable if your average payment terms are long. Always compare your DSO to your standard payment terms (e.g., net 30, net 60).

More importantly, track your DSO's trend over time. A rising DSO, even if still below your payment terms, indicates a problem.

Collection Effectiveness Index (CEI)

CEI measures the efficiency of your collection efforts. It compares the amount of cash collected in a period to the amount that was collectible. A high CEI indicates effective collections.

Aging bucket velocity

Monitoring aging bucket velocity can predict future write-offs. This involves tracking how quickly invoices move through different aging categories (e.g., 30-60 days, 60-90 days).

If invoices are spending longer in older buckets, it signals increasing risk.

Customer payment pattern changes

Subtle shifts in customer payment patterns often predict future problems. If a historically prompt payer starts delaying, it could be a sign of financial distress on their end.

Modern AR platforms provide predictive analytics to flag these changes automatically, allowing for proactive intervention.

Don't let AR inefficiencies damage your financial health

Inefficient accounts receivable processes can lead to serious cash flow problems and mounting bad debt.

Whether it's issues with credit, invoicing, tracking, collections, or cash application, these bottlenecks directly impact your bottom line.

Imagine this: Faster cash conversion, stronger customer relationships, and a significant reduction in the time your team spends chasing payments. This is the power of AR automation, and it's essential for proactive financial management.

Ready to transform your AR? Chaser offers a comprehensive AR automation solution designed to streamline your entire process. By implementing Chaser, you can drastically reduce your DSO and bad debt, freeing up valuable time and resources.

Take control of your financial future. Automate your accounts receivable with Chaser today.

Book a demo to transform your accounts receivable with Chaser.

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