Accounts receivable (AR) management is the process of invoicing, tracking, and collecting payments. Each of these processes comes with its own set of challenges and opportunities for improvement.

Automation can help businesses do more with many aspects of accounts receivable. Advanced analytics can predict payment behaviors, flagging potential late payments before they happen. Payment portals can offer customers flexibility, making it easier for them to settle bills and reducing the workload on a business’s collections team. Tech solutions for accounts receivable management are helping businesses refine their financial operations: the accounts receivable automation market is expected to grow by 13.3% by 2030.

But relying solely on a powerful tech stack is not enough. To make the most of their resources, businesses need a carefully thought-out strategy. Below, we’ll share best practices that businesses can use for accounts receivable management.

What’s in this article?

• What is accounts receivable management?
  
• How accounts receivable varies across industries
  
• Six accounts receivable management best practices
  
• Why is managing accounts receivable so important for businesses?
  

What is accounts receivable management?

Accounts receivable refers to the money that a business has a right to collect from its customers for goods or services provided. When a company sells something but has not yet received payment, the amount due becomes part of accounts receivable. These receivables function as a short-term asset on a company’s balance sheet, often appearing as an IOU from clients or customers.

How accounts receivable varies across industries

Here’s what accounts receivable looks like in different sectors:

• Creator economy
  In the creator economy, accounts receivable is the money owed to content creators or influencers by platforms, sponsors, or collaborators for content, partnerships, or advertising campaigns. This could be for videos, articles, podcasts, or other creative outputs that have been delivered by the creator but not yet paid for.

• Ecommerce and retail
  For ecommerce and retail businesses, accounts receivable represents the money that customers owe the business for goods purchased, especially in scenarios where purchase orders are used or credit is extended. It might also include amounts due from certain payment gateways or third-party sales channels that have a delay in fund transfers.

• Marketplaces
  Within marketplaces, accounts receivable can relate to funds that buyers owe to the marketplace for items purchased. Alternatively, it might represent money that the marketplace owes sellers for products sold, after deducting platform fees or other charges, especially if there’s a payment schedule or holding period.

• On-demand services
  For on-demand services, such as ride-sharing, food delivery, or home services, accounts receivable denotes the money owed to the service provider by customers who have received the service but have not yet paid for it. It can also refer to funds to be received from intermediary platforms that manage transactions.

• Platforms
  In the context of platforms, accounts receivable covers the amounts due from advertisers, subscribers, or any other entity that uses the platform for business purposes. Those could be for ad space, premium features, or any other monetized aspect of the platform.

• Software-as-a-service (SaaS)
  For SaaS companies, accounts receivable represents money due from clients or businesses that have subscribed to or purchased software services but have not completed the payment. This might be for monthly subscription fees, annual licenses, or any custom software development.

• Subscription
  In subscription-based businesses, accounts receivable indicates the money subscribers owe for accessing content, products, or services on a recurring basis. For instance, if a subscriber is billed monthly but hasn’t yet paid for the current month, that amount would be part of the company’s accounts receivable.

Six accounts receivable management best practices

While there are no set rules for making the most of your accounts receivable management strategy, here are six general best practices that most businesses will find helpful.

1. Automate accounts receivable processes

Using technology as part of accounts receivable can refine business operations, allowing businesses to simplify and fortify their invoicing and collections processes.

Key benefits

• Expedited operations: Automation works in the background, executing repetitive tasks accurately and significantly faster than manual processes. Increased speed leads to faster payment cycles, which can improve cash flow.
  
• Precise execution, reduced errors: No matter how carefully manual processes are performed, they are prone to errors. Automation reduces these errors drastically, instilling confidence in the system.
  
• Augmented resource allocation: With automation in charge of routine tasks, employees can focus on more complex, strategic aspects of AR management, driving value and innovation.
  

Actionable tips

• Choose software that integrates with existing sales and service platforms to make invoicing almost instantaneous after goods or services are delivered.
  
• Deploy automated reminders at specific intervals to nudge customers about impending or overdue payments.
  
• Sync data in real time to prevent unnecessary or repetitive communications.
  

2. Strengthen credit management policies

Extending credit to customers, either in-house or by using a third-party partner, can open up new revenue streams—but this can bring its own share of complications and liabilities. For businesses, fully understanding a customer’s creditworthiness and managing these relationships can improve financial stability and reduce fiscal vulnerabilities.

Key benefits

• Risk mitigation: By understanding a customer’s financial behavior and background, businesses can foresee potential payment pitfalls, thereby protecting themselves from future monetary setbacks.
  
• Reinforced financial health: Vigilant credit management can keep a company’s accounts receivable in check, preventing overwhelming bad debts that might affect liquidity.
  
• Trust in business relationships: When credit terms are set based on detailed evaluations, it fosters an environment of trust. Both the business and the customer understand the grounds on which these terms are built, creating a mutually respectful relationship.
  

Actionable tips

• Incorporate a consistent and thorough credit application procedure for all new customers. This sets the tone for a relationship built on transparency and mutual trust.
  
• Partner with specialized credit reporting agencies with in-depth knowledge about the financial history of prospective clients. Such collaborations provide businesses with the data they need to make sound credit decisions.
  
• Periodically reassess and adjust credit limits for long-standing customers. This practice ensures that credit terms grow in tandem with the business relationship.
  

3. Improve dispute resolution processes

Disputes are inevitable, especially in fields such as ecommerce and SaaS. The manner in which a business manages these disagreements can impact their financial health and reputation. Effective dispute resolution smooths out the revenue cycle while laying the groundwork for lasting customer relationships.

Key benefits

• Better cash flow: Resolving conflicts in a timely manner often translates to quicker payments, which contributes to a healthy cash flow.
  
• Increased customer loyalty: When disputes are handled with care and efficiency, customers feel valued. This can lead to stronger, more durable business connections.
  
• Positive brand image: A business known for resolving issues adeptly is viewed positively in the market, which can be advantageous for client acquisition and retention.
  

Actionable tips

• Establish clear, step-by-step procedures for handling disputes or chargebacks to streamline the resolution process.
  
• Adopt a unified system to log and monitor all disputes for transparency.
  
• Create open dialogues with clients to unearth the root causes of disputes.
  
• Invest in comprehensive training programs that focus on negotiation tactics and superior customer service.
  

Improving your dispute resolution strategy can benefit your business. Beyond the immediate financial advantages, it positions your business as trustworthy and customer-centric, fostering growth and longevity.

4. Communicate clearly and consistently

Strong, consistent, effective, and accessible communication practices are important for successful AR management.

Key benefits

• Build trust: When customers feel informed and understand what to expect from a business, their trust grows.
  
• Reduce ambiguities: Clear communication eliminates potential misunderstandings, which could otherwise lead to payment delays or disputes.
  
• Reflect business image: A company’s communication methods and style, especially in written forms like invoices and reminders, demonstrates its professionalism and values.
  

Actionable tips

• Create a regular invoicing rhythm to give customers a sense of predictability. They can anticipate and plan for upcoming bills, making it easier to manage their own finances.
  
• Avoid convoluted language. Keeping communications straightforward makes them easier to understand.
  
• Regularly revisit and update communication materials to ensure they remain relevant and in line with contemporary business etiquette.
  
• Provide open channels in which team members can discuss AR strategies, customer feedback, and any challenges they face.
  

Strong communication in AR management can reduce potential friction points in the billing cycle and create lasting, positive relationships with clients. Over the long term, these benefits contribute to steady revenue streams and a trustworthy business image.

5. Offer flexible payment terms

Adjusting payment conditions based on individual client histories and behaviors helps cultivate relationships, rewards loyalty, and safeguards business interests.

Key benefits

• Strengthening client relationships: Offering favorable conditions to regular clients rewards them for their loyalty while encouraging them to continue doing business with you.
  
• Mitigating financial exposure: Asking newer clients or those with less predictable payment behaviors to make an upfront partial payment reduces the risk of total non-payment.
  
• Encouraging positive payment practices: Early payment discounts can incentivize clients to prioritize payments to your business over others, potentially speeding up the payment cycle.
  

Actionable tips

• Review the payment history of each client. Are they often late? Do they generally pay early? Using this data helps determine which terms might be most appropriate for each client.
  
• Offer customers a range of options. For instance, consistent payers might be given the option of extended terms with a small discount for early payment, while those with a less consistent history might be offered standard terms but with the option for installment payments.
  
• Review the effectiveness of your payment terms. Are they resulting in faster payments? Are clients taking advantage of the offered discounts? This ongoing review allows businesses to tweak and adapt their offerings for optimal results.
  

By tailoring payment terms, including recognizing and valuing consistent clients and being prudent about potential financial risks, businesses can build better client relationships. This approach offers direct financial benefits while supporting a business’s long-term health and reputation.

6. Use data for smarter AR choices

Using complete, accurate data can improve the effectiveness and predictability of incoming funds.

Key benefits

• Improved predictability: By closely monitoring payment histories, businesses can anticipate when payments will come in, making financial planning smoother.
  
• Risk mitigation: Recognizing patterns of late payments or missed payments allows businesses to address these issues early, either by adjusting terms or increasing follow-up efforts.
  
• Efficient resource allocation: Understanding which accounts might pose problems can allow a business to allocate its resources more effectively and avoid wasting time in chasing unlikely payments.
  

Actionable tips

• Review the timelines and regularity of customer payments to identify customer payment patterns.
  
• Monitor metrics such as the average time it takes from making a sale to receiving payment for insights into operational efficiency.
  
• Use predictive analysis to predict future outcomes. For instance, if a business notices that clients from a particular industry often delay payments during certain months, the business can anticipate this trend in the future and plan accordingly.
  

Using data in this way allows businesses to make smarter decisions, anticipating challenges and addressing them in advance. This shift improves cash flow and leads to stronger client relationships.

Why is managing accounts receivable so important for businesses?

Accounts receivable is often dismissed as a routine concern for businesses, but as payment methods and terms become more advanced, a strategic approach to accounts receivable can offer businesses major benefits. These include:

• Liquidity and solvency
  Managing accounts receivable in an effective way ensures that a business has enough liquidity to meet its short-term obligations. A delay in collecting receivables can strain a company’s cash reserves, leading to challenges in covering operational expenses.

• Operational efficiency
  Proper management allows businesses to identify inefficiencies in their billing and collection processes. Streamlining these processes can reduce the time between making a sale and collecting payment.

• Financial health indication
  The status of accounts receivable can serve as an indicator of a company’s financial health. A consistently high amount of outstanding receivables might indicate customer dissatisfaction or inefficiencies in the credit screening process.

• Customer relationship management
  Reviewing accounts receivable regularly can help businesses identify customers who frequently delay payments. This information can guide decisions about extending credit to these customers in the future and maintaining healthy business relationships.

• Revenue recognition
  For businesses that follow accrual accounting, revenue is recognized when earned, not when cash is received. Proper management ensures accurate revenue recognition and financial reporting.

• Cost savings
  Efficient accounts receivable processes can reduce the costs associated with debt collection, bad debts, and administrative overhead.

• Cash flow forecasting
  Predictable cash flows are important for planning, capital expenditures, and growth initiatives. Proper management helps businesses maintain accurate cash flow forecasting by providing clarity on when receivables are likely to be converted to cash. Funds that are tied up in outstanding receivables could be better used elsewhere, such as by investing in growth opportunities or filling necessary job roles. Efficient collection can open up these opportunities.

• Bad debt reduction
  Effective management can lead to early detection of potential bad debts, allowing businesses to take timely actions such as setting up allowances or tightening credit policies.

• Decision-making support
  Data from accounts receivable can provide valuable insights into sales trends, customer buying habits, and market conditions. These insights can inform business decisions, from product offerings to market expansion.

How Stripe Revenue Recognition can help

Stripe Revenue Recognition helps to streamline accrual accounting—including audits, end-of-month close, reporting, and more—so you can close your books with greater efficiency and accuracy. It automates and configures revenue reports to help support compliance with ASC 606 and IFRS 15.

Revenue Recognition can help you:

• Gain a more complete view of your revenue: In the Stripe Dashboard, see all your Stripe transactions and terms, and import non-Stripe data.

• Automate revenue reports: Generate accounting reports that are ready to use—without engineering resources.

• Customize for your business: Create and automate custom rules to recognize revenue, in line with your business’s accounting practices.

• Audit in real time: Prepare for audits by tracing any revenue amount down to the underlying customers and transactions.

Learn more about how Revenue Recognition can help you comply with global accounting principles, or get started today.