Summary
Accounts receivable management is the critical process of tracking and collecting funds owed by customers for goods or services purchased on credit. For finance teams, effective AR directly dictates how swiftly revenue transforms into usable cash, underpinning a business’s operational liquidity and growth potential. This guide delves into the core AR lifecycle, essential performance metrics, and the best practices, including automation, that empower businesses to optimize collections without escalating headcount.
Key Takeaways
- Accounts receivable (AR) management is vital for converting revenue into actual cash, ensuring a business’s financial stability.
- Effective AR management directly impacts cash flow, working capital, and the accuracy of financial reporting, making it a cornerstone of business health.
- The AR lifecycle involves five key steps: credit assessment, invoicing, payment tracking, collections, and cash application.
- Key performance indicators like Days Sales Outstanding (DSO), AR Turnover, and AR aging bucket analysis are essential for measuring collection efficiency.
- Automating AR processes, offering diverse payment options, and setting clear credit policies are best practices to significantly improve collection speed and reduce operational burden.
What is Accounts Receivable Management?
Accounts receivable management is the process of tracking and collecting money owed to a business by customers who purchased goods or services on credit. It encompasses everything from setting credit policies and generating invoices to following up on overdue payments and applying cash when it arrives.
For finance teams, AR management directly determines how quickly revenue converts into usable cash. This guide covers the core AR lifecycle, key performance metrics like DSO and AR turnover, best practices for accelerating collections, and how automation can help scale AR operations without adding headcount.
Why Accounts Receivable Matters to Finance?
Accounts receivable management is the process of tracking and collecting money that customers owe a business for goods or services purchased on credit. It includes setting credit policies, generating invoices, following up on overdue payments, and applying cash when it arrives.
For finance teams, AR management determines how quickly revenue converts into usable cash. A company can look profitable on paper yet struggle to cover payroll if receivables sit uncollected for months—indeed, 82% of small businesses fail due to cash flow problems. That’s why AR management is a cornerstone of financial health rather than just an administrative task.
Meaning and Definition
Accounts receivable represents the outstanding invoices a company has sent to customers who haven’t yet paid. On the balance sheet, AR appears as a current asset because it’s expected to convert to cash within one year.
- Accounts receivable (AR): Money owed to your business for delivered goods or services
- AR vs. accounts payable: AR is money owed TO you; accounts payable (AP) is money you OWE to others
- AR in accounting: Classified as a current asset, AR reflects credit extended to customers
Core Functions of Receivables Management
The AR function involves several interconnected activities that work together to ensure timely collection.
- Credit management: Evaluating customer creditworthiness before extending payment terms
- Invoicing: Creating accurate invoices and delivering them promptly
- Payment processing: Receiving payments and matching them to the correct invoices
- Collections: Following up systematically on overdue accounts
- Dispute resolution: Addressing billing questions or discrepancies that delay payment
How AR fits into the Order-to-Cash Cycle?
Accounts receivable sits at the heart of the order-to-cash (O2C) cycle. The process begins when a customer places an order, continues through fulfillment and invoicing, and ends when payment is collected and recorded.
AR management governs the critical stretch between sending an invoice and depositing the cash. When this stretch takes too long, working capital gets tied up and cash flow suffers.
Why Accounts Receivable Matters?
Why is Effective AR Management Critical for Business Health? The way a company manages receivables has ripple effects across cash flow, financial reporting, and customer relationships. Poor AR performance can starve a growing business of the working capital it requires to operate.
Impact on Cash Flow and Working Capital
Faster collections mean more cash available for payroll, inventory, and growth investments. For many B2B companies, accounts receivable is the single largest current asset on the balance sheet.
When receivables age, that capital sits locked up instead of funding operations. Even a profitable company can face a cash crunch if customers pay slowly.
Connections to Financial Close and Reporting
Accurate AR data is essential for reliable financial statements. The AR balance feeds directly into revenue recognition, bad debt reserves, and cash flow projections.
Auditors scrutinize AR aging and collection history, so clean records reduce audit risk and accelerate the monthly close. Inaccurate AR data, on the other hand, can delay reporting and raise red flags.
Core Functions of Receivables Management
Ineffective AR management creates costs that don’t always show up on an income statement.
- Bad debt write-offs: The longer an invoice ages, the less likely it is to be collected, with most businesses experiencing bad debt ratios around 1.6-3%
- Increased borrowing costs: Cash shortfalls may force expensive short-term borrowing
- Strained customer relationships: Disorganized collection efforts can damage goodwill with otherwise healthy accounts
The Five Steps to Managing Accounts Receivable
What are the Five Steps to Managing Accounts Receivable Effectively?
The AR lifecycle follows a predictable sequence, from vetting customers before extending credit to reconciling payments after they arrive.
Step 1. Credit Assessment and Customer Approval
Before extending payment terms, evaluate the customer’s ability and willingness to pay. Many finance teams use the “5 C’s of credit” to set appropriate credit limits and terms:
- Character: The customer’s reputation and payment history
- Capacity: The customer’s ability to pay based on cash flow
- Capital: The customer’s overall financial resources
- Collateral: Assets that could secure the debt if needed
- Conditions: Economic and industry factors affecting payment likelihood
Step 2. Invoice Generation and Delivery
Once goods or services are delivered, generate an accurate invoice and send it promptly. Delays in invoicing directly delay payment.
Electronic invoicing speeds delivery and creates a clear audit trail. It also reduces the chance of invoices getting lost in the mail or stuck in an email inbox.
Step 3. Payment Tracking and Reminders
Monitor open invoices and send reminders before and on the due date. AR aging reports help prioritize follow-up by showing which invoices are current, 30 days past due, 60 days, and beyond.
A friendly reminder a few days before the due date can significantly improve on-time payment rates without straining the customer relationship.
Step 4. Collections and Dunning Workflows
Dunning refers to the systematic process of contacting customers about overdue payments. Effective dunning starts with friendly reminders and escalates gradually, balancing persistence with customer relationship preservation.
A typical dunning sequence might include an email at 7 days past due, a phone call at 14 days, and a formal letter at 30 days. The key is consistency.
Step 5. Cash Application and Reconciliation
When payment arrives, match it to the correct open invoice. This process is called cash application.
Cash application also involves handling partial payments, overpayments, and reconciling the AR subledger to the general ledger. Once the payment is applied and reconciled, the AR cycle for that invoice is complete.
How to Measure AR Management Performance
How Do You Know if Your AR management is Effective?
Finance teams track specific KPIs to assess collection efficiency and spot problems early.
Days Sales Outstanding (DSOs)
Days Sales Outstanding (DSO) measures the average number of days it takes to collect payment after a sale. Lower is better.
DSO = (Accounts Receivable ÷ Total Credit Sales) × Number of Days
For example, suppose a company has $500,000 in AR and $3,000,000 in quarterly credit sales (90 days). The DSO would be ($500,000 ÷ $3,000,000) × 90 = 15 days. That means, on average, the company collects payment 15 days after invoicing.
Accounts Receivable Turnover Ratio
The AR Turnover Ratio shows how many times receivables are collected during a period. Higher ratios indicate more efficient collections.
AR Turnover = Net Credit Sales ÷ Average Accounts Receivable
For example, with $5,000,000 in annual credit sales and average AR of $500,000, AR Turnover = 10. That means receivables turn over 10 times per year, or roughly once every 36 days.
AR Aging Bucket Analysis
An aging report categorizes outstanding invoices by how long they’ve been unpaid. This helps teams prioritize collection efforts on older, higher-risk balances.
The older an invoice gets, the harder it becomes to collect. That’s why aging reports are one of the most important tools in AR management.
Accounts Receivable Best Practices for Finance Teams
How can Finance Teams Improve AR Performance without Adding Headcount? A few targeted practices can meaningfully reduce DSO and collection effort.
Automate Dunning and Payment Reminders
Automated email sequences for payment reminders reduce manual follow-up and ensure consistent communication. Reminders sent before, on, and after the due date keep invoices top of mind for customers.
Offer Multiple Payment Options
Accepting ACH, credit cards, wire transfers, and digital payment links removes friction. The easier it is to pay, the faster customers tend to do so.
Enable Customer Self-Service Portals
A self-service portal where customers can view invoices, check balances, and pay online reduces inbound inquiries. It also empowers customers to resolve questions and pay on their own schedule.
Set Clear Credit and Collection Policies
Documented policies for payment terms, credit limits, and escalation procedures create consistency. Clear policies also set expectations with customers upfront, reducing disputes later.
Track AR Metrics Weekly
Monitoring DSO and aging reports weekly rather than waiting for month-end provides early warning of collection problems. Weekly tracking allows teams to act before small issues become big ones.
Common Challenges in AR Management
Many finance teams encounter similar pain points as they scale.
- Manual processes and spreadsheet dependency: Tracking AR in spreadsheets is error-prone and doesn’t scale well as invoice volume grows
- Poor visibility into payment status: Fragmented data makes it hard to know which invoices are at risk until it’s too late
- Customer disputes and billing errors: Inaccurate invoices delay payment and strain relationships
- Disconnected billing and accounting systems: Manual data entry between systems creates reconciliation headaches and slows the close
What is Accounts Receivable Automation?
Accounts receivable automation uses software to handle repetitive AR tasks with minimal manual intervention. Invoicing, payment collection, dunning, and cash application can all be automated.
An AR automation platform typically integrates with billing and accounting systems—a market worth USD 3.79 billion in 2026 and growing rapidly. It generates invoices automatically, tracks payment status in real time, triggers reminder sequences, applies cash when payments arrive, and posts journal entries to the general ledger.
Key capabilities of AR automation software include:
- Automated invoice generation and delivery
- Multi-channel payment acceptance with retry logic for failed payments
- Configurable dunning workflows
- Automated cash application and reconciliation
- Real-time aging reports and dashboards
The benefits of automating AR operations are straightforward. Timely reminders and easy payment options accelerate collections. Staff can focus on exceptions rather than routine tasks. System-driven processes improve accuracy. And clear communications with self-service options improve the customer experience.
Managing Accounts Receivable for Subscription and Recurring Revenue
Companies with recurring billing face unique challenges that traditional AR processes weren’t designed to handle.
First, there’s the volume of recurring invoice generation. A subscription business might create thousands of invoices on different billing cycles each month. Second, prorations and mid-cycle changes add complexity. Handling upgrades, downgrades, and cancellations mid-term requires precise calculations.
Third, failed payments and involuntary churn are a constant concern. Expired credit cards and failed transactions can cause customers to churn even when they want to keep paying. Automated retry logic, card expiration alerts, and configurable suspension workflows help recover revenue that would otherwise be lost.
Finally, multi-currency operations add another layer. Billing and collecting across currencies and local payment methods requires specialized capabilities that most traditional AR systems lack.
Ordway’s Accounts Receivable Automation platform helps finance teams reduce DSO, automate collections, and scale AR operations without adding headcount. See how it works →
Conclusion
Ultimately, robust accounts receivable management isn’t just about collecting money; it’s about safeguarding your business’s financial future. By optimizing each step of the AR lifecycle, leveraging key metrics, and embracing automation, finance teams can ensure healthy cash flow, improve financial reporting accuracy, and strengthen customer relationships. Don’t let uncollected revenue starve your growth—make AR a strategic priority to foster resilience and drive sustainable success.
Frequently Asked Questions
What are the 5 C’s of accounts receivable management?
The 5 C’s of credit are character (reputation and payment history), capacity (ability to pay), capital (financial resources), collateral (assets to secure credit), and conditions (economic and industry factors). Finance teams use these criteria to evaluate a customer’s creditworthiness before extending payment terms.
What is accounts receivable management?
Accounts receivable management is the process of tracking and collecting money that customers owe a business for goods or services purchased on credit. It includes setting credit policies, generating invoices, following up on overdue payments, and applying cash when it arrives.
What do accounts receivable managers do?
Accounts receivable managers oversee timely collection of payments, monitor invoicing procedures, perform credit checks on new customers, and interact with customers to resolve non-payment cases. They track AR metrics like DSO and aging reports to maintain healthy cash flow.
