Accounts Receivable Management: What It Is & How to Improve It

Accounts receivable management involves tracking and securing customer payments after orders have been placed. Much more involved than cashing a check or ticking a “paid” box, A/R management directly impacts your business’s cash flow and liquidity and, ultimately, your organization’s bottom line.

Read to learn about common accounts receivable management processes, challenges, best practices, and more.

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Why does accounts receivable management matter?

At its core, accounts receivable management ensures that an organization promptly receives payments for goods and services. By tracking outstanding invoices, promptly addressing late payments, and nurturing customer and vendor relationships, businesses with effective A/R management can more efficiently cover operational costs, invest in growth opportunities, optimize their cash flow, and weather unforeseen financial challenges.

Conversely, a business without a well-organized accounts receivable management system risks encountering cash flow gaps, hindered ability to meet immediate financial obligations, missed growth prospects, and, in extreme cases, bankruptcy.

Accounts receivable management is also a critical component of customer relationship management. Timely and accurate billing and professional communication regarding payments build trust and confidence in business-client relationships.

Effective accounts receivable management is not just about financial prudence; it’s a strategic approach that safeguards a company’s financial health while fostering positive customer experiences, laying the foundation for sustained business growth .

Accounts receivable management processes

Though the exact process may vary from one business to another, every organization’s accounts receivable process revolves around billing — when customers are sent invoices to notify them of outstanding bills — and payment collection — when those invoices are reconciled. The actual step-by-step accounts receivable management process goes something like this:

1. 1. A customer places an order: This step technically initiates the accounts receivable process, but remember that your customer relationship management of other clients can help get new clients in the door.
   2. The company evaluates the customer against its credit standards: Many businesses operate on credit, allowing time to elapse between the placement of an order and payment. It’s essential, then, that a company assesses the customer’s creditworthiness before extending credit. If the customer does not meet the company’s standards, the company may require that the customer pay upfront.
   3. The company sends an invoice to the customer: After credit approval, the company generates and dispatches an invoice detailing the products or services provided, along with the payment due date and terms.
   4. The company manages collections monitoring for late payments: A proactive approach involves monitoring payment schedules, sending reminders, and communicating to ensure timely payments and maintain a healthy cash flow.
   5. When necessary, the company investigates and addresses disputes: When disputes arise, the company investigates the issue, resolves discrepancies, and ensures accurate invoicing, avoiding delays in payment collection.
   6. Payment processing: Upon receipt, the company processes the payment using the chosen method, verifying the transaction’s authenticity and accuracy. The received payment is accurately matched with the corresponding invoice (via cash application and other methods), updating the company’s records and customer balances in real-time.

   While the above outlines the general payment management process, another important (and ongoing) aspect of A/R management is the reporting and monitoring of a company’s current state of finances.

   Companies either choose to outsource these accounts receivable responsibilities or opt to do them internally. Here, A/R managers closely monitor metrics such as the average collection period, customer payment trends, outstanding receivables, and aging reports.

   By regularly gauging their financial standing, companies can gain valuable insights into their cash flow, identify potential issues or bottlenecks in the A/R process, and make informed decisions to optimize their financial stability and overall business operations.