Accounts Receivable Process: 8-Step Guide for Faster Collections

A company's income statement is the first stop for top management teams looking to improve profitability. 

Another critical (at times overlooked) area that impacts profitability and the business's overall financial health is Accounts Receivable (AR). Organizations that take time to evaluate unpaid invoices early, stratify due receivables, and set up strong collections policies will experience benefits far beyond the finance department.

But sadly, this is a missed opportunity for most companies…

According to VersaPay’s annual ’State of Digitization in B2B Finance’ report, 77% of the 300 CFOs interviewed revealed that their teams are not up to date on their accounts receivable.

We’re taking it from the top, explaining the entire accounts receivable process, identifying the challenges, and discussing ways in which you can optimize the AR process for your business.

What is the accounts receivable process?

The Accounts Receivable (AR) process begins with the customer placing an order for goods or services and ends when the outstanding payment owed to a business is received. The AR process ensures that payments that are owed to a business are collected on time.

What really caught our attention is that — owing to invoice processing complications, nearly 2 in 5 CFOs reported that their AR teams are weeks and, in some cases, months behind and will never catch up on invoices.

The President of The Kaplan Group, Dean Kaplan, couldn’t have put it better when he said that “unpaid invoices take a nasty bite out of cash flow”. All this brings to light the need for an efficient accounts receivable process to ensure unpaid invoices don’t end up crippling cash flow and stunting business growth.

Quick summary on accounts receivable process

• The accounts receivable process includes eight steps — starting when a customer places an order, followed by assessing the customer’s credibility, generating an invoice, following up on payments, addressing invoice disputes, writing off bad debts, accepting payments, and finally reconciling them.
• There are a few challenges that businesses have to deal with in the accounts receivable process. This includes inefficiencies in invoicing, difficulties in tracking and reconciling payments, and poor communications and follow-up processes.
• Automating the accounts receivable process can not only speed up the invoice processing time but also enable businesses to get better visibility of outstanding invoices, enhance reporting capabilities, and scale up billing and collection processes with ease. 

The 8-step accounts receivable process

Converting accounts receivable into cash is critical to keeping your income statement intact. We’re breaking down the 8-step accounts receivable process that will help you manage invoicing and collections better and transform your order-to-cash process.

The AR process gets initiated when the customer places an order, goes on to include multiple steps such as assessing the creditworthiness of the customer, generating an invoice, and sending payment reminders — and ends only once the outstanding payment has been collected. 

Let’s delve deeper into the 8-step accounts receivable process:

Step 1: The customer places an order

Once the customer has placed an order, the business will need to approve the Purchase Order (PO). This kickstarts the accounts receivable process. After the PO is approved, a sales order is created by the business, which is a binding order with the customer and includes the details of the sale like the quantity, price, and other relevant terms. 

Step 2: Assessing the creditworthiness of the customer

For businesses that undertake large orders involving high-value transactions, it’s important to assess if the customer is capable of paying up on time. To ensure this, businesses assess the customers’ credibility and check past payment histories before issuing an invoice. Businesses can choose to skip this step for recurring payments where the customer has already proven their credibility in the past.

Step 3: Generating an invoice

Once the customer’s credibility is determined, businesses can proceed to raise an invoice. The invoice will include details of the purchase and the payment terms. Any late fees that are chargeable or discounts offered should also be included in the invoice.

50% of CFOs at companies with revenues of $250 million or more state their AR teams process over 2,500 invoices a month. As such, businesses today need billing systems with scalable and flexible features that allow them to automate invoice generation and configure complex pricing models and contracts.

Step 4: Sending timely payment reminders

In an ideal world, your customers would pay every invoice — in full — and on time. But the reality is that unpaid invoices have become an inevitable pet peeve for businesses. 

Managing collections is in itself an uphill task. What many businesses fail to assess is the costs, time, and effort associated with managing bad debts. 

It’s important to take into account the time and resources spent on analyzing past-due balances, following up on unpaid invoices, negotiating, and keeping track of non-paying customers. Businesses need automated payment reminders and dunning sequences to speed up payments and improve cash flow.

Step 5: Addressing and settling disputes, if any

Report findings reveal that AR teams end up spending way too much time (more than half of their workdays) dealing with invoice disputes. In most cases, customers end up paying late due to invoice disputes. AR teams need to promptly address and initiate the invoice dispute resolution process early to ensure strong customer relationships and prevent any further delays.

At times, customers may choose to pay a portion of their invoice that’s not in dispute. This is called a short payment. It makes the entire process more complicated for AR teams when it comes to applying short payments to the accounting systems and reconciling them.

Step 6: Writing off uncollectible debts

The business’s chances of collecting outstanding invoices slim down as the days pass by. What happens when all attempts to collect payments end up being ignored by the customer? This debt will be written off as a bad debt.

Step 7: Accepting and processing payments

It’s imperative for you to make it easy for your customers to pay you. Offering multiple commonly accepted payment options like cards, ACH, wire transfers, and digital payments like Venmo and PayPal is important. To accept payments online, businesses will need a payment gateway, a payment processor, and, in most cases, a merchant account.

Step 8: Managing reporting and analytics

The AR team will need to stay on top of many critical metrics like Days Sales Outstanding (DSO), Monthly Recurring Revenue (MRR), and AR Turnover Ratio. When it’s time to close the books, AR teams will need to record all transactions and keep the AR accounts on the general ledger up-to-date. 

KPIs to track AR performance

These metrics provide insights into your cash flow, customer payment behaviors, and the efficiency of your AR processes:

1. Days sales outstanding (DSO)

• Measures the average number of days it takes to collect payment after a sale.
• Formula: (Accounts Receivable ÷ Total Credit Sales) × Number of Days.
• A lower DSO indicates faster collections and improved cash flow.

2. Accounts receivable aging report

• Categorizes unpaid invoices based on how long they've been outstanding (e.g., 0–30 days, 31–60 days).
• Helps identify overdue accounts and assess the effectiveness of collection efforts.

3. Invoice error rate

• Percentage of invoices issued with errors.
• Formula: (Number of Invoices with Errors ÷ Total Invoices Issued) × 100.
• High error rates can delay payments and strain customer relationships.

4. Percentage of on-time payments

• Proportion of invoices paid by the due date.
• Formula: (Number of On-Time Payments ÷ Total Payments Received) × 100.
• A higher percentage indicates efficient collections and satisfied customers.

5. Collection effectiveness index (CEI)

• Assesses the efficiency of the collections process over a specific period.
• Formula: [(Beginning Receivables + Credit Sales – Ending Total Receivables) ÷ (Beginning Receivables + Credit Sales – Ending Current Receivables)] × 100.
• A CEI closer to 100% signifies highly effective collection efforts.

6. Average days delinquent (ADD)

• Average number of days payments are overdue.
• Formula: DSO – Best Possible DSO.
• Helps identify issues in the collections process and potential bad debts.

7. Accounts receivable turnover ratio

• Indicates how often receivables are collected during a period.
• Formula: Net Credit Sales ÷ Average Accounts Receivable.
• A higher ratio suggests efficient credit and collection processes.

8. Bad debt to sales ratio

• Measures the proportion of sales that become uncollectible.
• Formula: (Bad Debts Written Off ÷ Total Sales) × 100.
• A lower ratio indicates effective credit risk management.

Importance of a streamlined AR process

• Efficient AR processes ensure quicker invoice generation and payment collection, directly enhancing cash inflows.
• Implementing automated invoicing and payment reminders can significantly reduce Days Sales Oustanding (DSO), leading to improved liquidity.
• Clear and timely billing reduces disputes, fostering trust and potentially leading to repeat business.

Common AR challenges hampering the accounts receivable process

As we’ve seen so far, the AR process involves a series of complicated steps that introduce challenges in invoicing, reconciling payments, and lapses in communications.

With finance teams facing difficulties across multiple fronts in today’s volatile economic climate, sticking to manual AR processes and legacy collection methods ends up increasing financial risks, straining customer relationships, and eroding the organization’s resilience to tide over economic uncertainties.

Here are a few challenges that could crop up in the accounts receivable process:

1. Inefficient invoicing processes

Inaccurate or delayed invoicing can lead to late payments. Delayed payments are a persistent issue, often stemming from inefficient invoicing, lack of follow-ups, or customer disputes. These delays can disrupt cash flow and increase the risk of bad debts.Errors in invoices or unmet service expectations can also lead to disputes, causing payment delays and requiring additional resources to resolve.

2. Tracking and reconciling payments across multiple, siloed systems

Many AR teams are still ‘making do’ with a patchwork of systems involving spreadsheets and legacy billing tools. The result? A lot of information gets lost in transmission, resulting in incorrect payment records or, worse, missed payments.

With too many disparate and fragmented systems, AR teams often find it hard to reconcile payments and keep the financial statements updated. While manual processes are prone to human error, they also create multiple sources of data, resulting in AR teams taking weeks to record cash inflows and reconcile accounts.

3. Lapses in communications (both internally and with clients)

In many cases, late payments can be traced back to poor communication or a lack thereof. AR teams that manually handle collections and payment reminders find it extremely challenging to send out timely payment reminders. Moreover, communications carried out with customers across multiple channels, like over calls and email, make collections a lot more difficult to track. They also have no centralized system to track unpaid invoices and determine which customers need to be reminded about upcoming payments and at what time.

Checklist: Is your AR process optimized?

1. Invoicing

• Are invoices accurate, clear, and detailed?
• Sent promptly after delivery, consistently?

2. Collection Process

• Clear, communicated credit terms?
• Automated follow-ups on overdue invoices?
• Flexible, customer-friendly payment options?
• Proactive payment collection and quick dispute resolution?

3. Communication

• Open, ongoing communication with customers?
• Strong customer relationships fostering timely payments?
• Cross-team involvement in AR workflows?

4. Monitoring & Analysis

• Tracking KPIs like DSO, CEI, bad debt ratio?
• Regular AR aging analysis to flag risks?
• Consistent reporting to stakeholders?

5. Technology & Automation

• Using AR management software to cut manual work?
• Offering electronic billing and online payment options?

Why should you automate your accounts receivable process? 

With advanced billing automation tools, AR teams can benefit from:

• Timely invoice generation: AR teams that previously spent hours of manual effort on generating invoices can now invoice clients on autopilot. Some of the modern billing tools allow businesses to set up recurring schedules to generate invoices automatically, cutting down on the time spent on repetitive efforts as well as reducing invoicing errors that are prone to occur given the complex nature of today’s pricing models.

• Increased visibility of overdue payments and bad debts: Leveraging automated tools also enables businesses to gain greater visibility over their cash flow, identify late-paying customers or bad debts, and manage payments from a centralized dashboard.

• Effortless payment reminders: Following up with customers on pending payments should not be hard. Automated billing tools on the market today come loaded with functionalities like email templates and automated dunning sequences that let you send out payment follow-ups and reminders about reaching a certain threshold, overages, or failed payment alerts.

• Enhanced reporting capabilities: Modern billing tools with automation capabilities help AR teams track payment statuses on the go. They come with integrated dashboard capabilities and advanced reporting features that provide real-time updates on the critical metrics top management teams rely on.

• Scalable billing and collection systems: For businesses looking to scale up their operations and manage collections in bulk, automated tools reduce the administrative burden on AR teams, allowing them to scale up with ease and in a cost-effective manner. These tools also enable you to stratify your receivables and maximize ROI by prioritizing high-value accounts. This way, your AR teams can focus more on strategic aspects and on invoices that make up the bulk of your outstanding receivables.

Accounts receivable tools equip finance teams with advanced billing, collections, customer communications, and reporting capabilities. We’ve done the groundwork, and we’ve got our pick of the top accounts receivable software out there. Read through our blog on the best AR tools to find the one that fits your use case.

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Optimize your AR processes with Zenskar

Globally, top-performing organizations are spending less time on the AR process cycle and relying on modern billing tools like Zenskar to prioritize high-dollar accounts and collect payments in days instead of weeks.

In addition to automating the end-to-end billing and invoicing processes, there are a few advanced AR functionalities that set Zenskar apart from the rest of the tools out there.

With Zenskar, you can:

• Scale your debt communications with branded email templates
• Segment customers based on key attributes like customer aging status, geography, and payment status
• Leverage customized dunning sequences to prioritize high-risk accounts
• Add payment links directly to the invoice 
• Track and map refunds and reversals by invoices and customers
• Measure usage data and set up usage alerts for your customers
• Access reports in real time and stay compliant with evolving regulations 

The best part? You can do all this without relying on engineering bandwidth.

Experience efficient and faster payment collections

As central banks lift rates and raising funding from external sources becomes a painstakingly difficult task by the day, CFOs are prioritizing enhancing the accounts receivable process more than before.

Zenskar’s advanced debt management capabilities work much like an email management software within your billing system. Businesses now have the option to use customizable branded templates and send out timely payment reminders. Apart from personalizing debt communications and sending them at scale, businesses can also configure preferred payment methods and manage all things payment (payment status, partial payments, reversals) from a single dashboard.

Reimagine your AR process cycle with Zenskar. Book a demo today!