The Accounts Receivable Process – a Step-by-Step Guide [Data + Templates]

26 September, 2022
14 mins
Brett Johnson, AVP, Global Enablement

Table of Content

Key Takeaways
What is the Accounts Receivable Process?
The 8 Accounts Receivable Process Steps
7 Key Performance Indicators for Successful Accounts Receivable Procedures
Traditional vs. Modern Accounts Receivable
How Automation Streamlines the Accounts Receivable Process
Elevate Your Accounts Receivable Process Flow with HighRadius

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Key Takeaways

  • Discover the 8-step accounts receivable process roadmap t ensure a healthy cash flow.
  • Explore key performance indicators (KPIs) to gauge the efficiency of your accounts receivable operations.
  • Understand the challenges of traditional accounts receivable practices and identify opportunities for automation and efficiency gains.


If you’re involved in finance or run a business, you know that accounts receivable isn’t merely a line item on your balance sheet. It’s essential for maintaining a healthy cash flow, which is crucial for your business’s sustainability.

Yet, managing it effectively can be a complex task fraught with challenges—from delayed payments to reconciliation errors.

In this practical guide, we’ll walk you through what accounts receivable is, accounts receivable process steps, and the key performance indicators for successful accounts receivable procedures. 

Additionally, we will be sharing free accounts receivable templates with you to make implementation easier. Let’s get started.

Before we jump into the accounts receivable process, let’s clarify what accounts receivable is to make sure we know the basics.

What is Accounts Receivable?

Accounts receivable refers to the outstanding invoices your company has, which represent the money owed to you by customers for goods or services that have been delivered but not yet paid for.

Think of it as a short-term IOU from your customers. Managing accounts receivable effectively is crucial for cash flow, as it represents revenue that you’ve earned but haven’t collected. It’s an asset on your balance sheet that you’ll want to convert into cash as quickly as possible.

What is the Accounts Receivable Process?

The accounts receivable (AR) process is a systematic set of actions that businesses follow to invoice clients, track payments, and collect funds owed for goods or services provided. It acts as a connection between sales and revenue, ensuring that transactions are completed through timely payments.

This process is essential for converting sales into actual revenue, which is vital for the financial health and growth of a business.


To fully understand the process, you need to be familiar with all the steps, which we will cover in detail in the ‘Accounts Receivable Process Steps’ section.

Why is the Accounts Receivable Process Important?

The accounts receivable (AR) process is far more than just a set of administrative tasks; it’s a critical component of your company’s financial health. While the core activities may seem straightforward—

  1. Sending out invoices
  2. Managing collections
  3. Processing payments
  4. Posting them to your Enterprise Resource Planning (ERP) system

—Each of these tasks can be highly intricate, especially if your AR team is navigating manual workflows.

It’s not merely about keeping tabs on individual transactions; in the broader context, the AR process is about cultivating ongoing relationships and securing a consistent cash flow.


The 8 Accounts Receivable Process Steps

Below, we break down the process into 8 comprehensive steps, providing you with a roadmap for effective AR process management.


Step 1: Customer Order Placement

When a customer decides to make a purchase, they’ll typically send a purchase order. Upon approval, a sales order is generated, which serves as a binding agreement detailing the goods or services, their quantity, price, and other terms of the sale. Before proceeding, it’s crucial to assess the customer’s creditworthiness.

Step 2: Credit Approval

Before you even send out an invoice, it’s crucial to assess the creditworthiness of your customers. This is especially important if transactions involve significant sums and extended payment terms.

A thorough credit application process is essential to assess the credit risk associated with each customer. Based on your company’s credit policy, you may approve or deny credit, or suggest alternative payment methods. Also, this process may vary depending on whether it’s a new or existing customer.

New Customers: 

Implement a credit application process that aligns with your company’s documented credit policy. This process may take a few days and should assess the customer’s financial stability and payment history.

Related Read: How to Assess the Creditworthiness of a New Customer: Step-by-step Guide

Existing Customers: 

Periodically review the credit terms for existing customers, especially if their order volume increases or their payment behavior changes. This ensures that you’re not exposing your business to unnecessary risk.

Step 3: Invoice Dispatch

An invoice serves as the definitive record of a customer’s purchase, outlining how much is owed and the payment due date. The quicker you can send out the invoice, the sooner your payment terms begin, so it’s beneficial to automate this step as much as possible.

Step 4: Collections Management

Late payments are an unfortunate reality. A structured collections process helps in following up with customers who have overdue invoices. The frequency and nature of these follow-ups can vary based on the customer’s payment history and the amount due.

Below are some time frames commonly used by companies for carrying out their collections outreach:


Step 5A: Writing Off Uncollectible Debts

When you’ve exhausted your outreach efforts (including passing off the debts to a collection agency or legal counsel) and determine the payment is uncollectible, you’ll write off the receivable as bad debt.

The timing for this can vary by industry and should be in line with your company’s financial policies. For some industries, like transportation services, for example, an average days sales outstanding (DSO) of above 50 days is normal. If late payments are common in your line of work, it makes sense to wait before writing off an invoice as bad debt.

Step 5B: Payment Processing

Business buyers pay their invoices in several ways, including:

  1. ACH or EFT
  2. Wire transfer
  3. Debit, credit, or virtual card
  4. Checks

Efficiently processing these payments is essential for accurate financial records.

Businesses that want to accept payments online will need a payment processor, payment gateway, and at least one merchant account, not to mention a platform to support e-commerce or self-service customer payments. Some payment service providers will wrap all of this up into one offering.

Most B2B businesses still accept a significant volume of paper checks, with a recent survey by AFP pointing to 92% of organizations continuing to use checks for incoming payments. To support this, businesses will often resort to managing multiple lockboxes (where a bank receives and processes checks for you).

Note that although lockbox services eliminate the need for you to receive checks at your office, they don’t take away the effort involved in processing them. Going through lockbox files to apply payments to invoices still takes work.

Step 6: Cash Application

Once a payment is received, it needs to be posted to the corresponding invoice(s). However, this process can sometimes be challenging due to factors such as missing remittance advice or discrepancies between the provided payment information and open invoices.

Related Watch: 3 Cash Application Best-Practices

Step 7: Dispute Resolution

Invoice disputes can delay payments significantly. If a customer raises an issue, it’s crucial to initiate the dispute resolution process promptly to prevent further delays and maintain good customer relations.

Customers will often pay the portion of their invoice that’s not in dispute (a short payment), which adds another layer of complexity for your AR team. They’ll have to confirm why the short payment happened, whether it was for a valid reason, and how to apply the payment in your accounting system.

Step 8: Reporting and Analytics

During the month-end close process, your finance team will check that they’ve recorded all transactions and put the closing balance of all general ledger accounts into a report (a trial balance). This allows you to put together financial statements for that period to report to the rest of the company.

Regular reporting on the status of your accounts receivable is crucial for financial planning and for assessing the effectiveness of your AR process. Metrics like Days Sales Outstanding (DSO) and Collections Effectiveness Index can provide valuable insights.

7 Key Performance Indicators for Successful Accounts Receivable Procedures

When it comes to evaluating the success of your accounts receivable process, it’s essential to focus on tangible business outcomes. These outcomes not only measure the efficiency of your AR operations but also directly impact your company’s bottom line. 

Here are the key performance indicators that signify a successful accounts receivable process:

Timely Invoicing

Prompt invoicing sets the stage for all subsequent steps in the AR process. It not only establishes payment terms but also greatly influences the speed at which payments can be collected. By ensuring invoices are sent promptly, you set a positive foundation for the entire payment collection process, enabling your business to receive payments promptly.

Collections Efficiency Index (CEI)

A high CEI indicates that your collections team is effective in recovering receivables. It’s a crucial metric that directly correlates with your cash flow and liquidity.

Days Sales Outstanding (DSO)

A low DSO means that your company takes fewer days to collect payments from customers. This is a vital indicator of operational efficiency and cash flow management.

Reduction in Bad Debt

Minimizing bad debt shows your AR process is working. It means that your credit policies are effective and that you’re doing a good job of vetting customers’ creditworthiness.


Reduction in % AR Open

A lower percentage of accounts receivable remaining open indicates that more invoices are being settled, which in turn improves your cash flow and financial stability.

Accurate Record-Keeping (Cash Reconciliation)

Meticulous record-keeping is non-negotiable. Accurate and timely cash reconciliation is crucial for financial reporting and compliance. It also aids in dispute resolution and enhances customer satisfaction.

Automation and Scalability

As your business grows, your AR process should be able to scale with it. Automation tools can help reduce manual errors, speed up the invoicing process, and provide real-time analytics.

Traditional vs. Modern Accounts Receivable

The accounts receivable landscape has undergone significant changes over the years, particularly with the advent of automation technologies. While traditional methods have their merits, modern automation offers a plethora of advantages that can dramatically improve efficiency and accuracy.

Below, we compare the two approaches to highlight their differences:


Traditional Accounts Receivable

Modern Accounts Receivable


Manual generation and dispatch of invoices.

Automated invoicing systems that send out invoices instantly.


Manual follow-ups and tracking of overdue accounts.

Automated dunning and past-due tracking systems.

Payment Processing

Manual entry, prone to errors.

Automated payment gateways and processing.


Physical files or basic digital records.

Cloud-based, real-time record-keeping.

Cash Reconciliation

Time-consuming manual reconciliation.

Automated reconciliation with real-time updates.


Difficult to scale without increasing manpower.

Easily scalable with minimal incremental effort.

Error Handling

Manual detection and correction, higher error rates.

Automated error detection and lower error rates.

Compliance and Security

Manual updates, higher risk of non-compliance.

Automated compliance updates, enhanced security features.

Reporting and Analytics

Basic reporting, often manually generated.

Advanced analytics and real-time reporting and insights capabilities.

Customer Experience

Limited self-service options for customers.

Enhanced customer portals and self-service options.


How Automation Streamlines the Accounts Receivable Process

The advent of automation has revolutionized the accounts receivable landscape, offering a host of benefits that streamline operations, reduce errors, and enhance customer satisfaction. Here’s how automation is making a significant impact:


Faster Invoicing

Automation allows for the instant generation and dispatch of invoices as soon as an order is confirmed via their preferred method—be it email, EDI, or even traditional mail. This not only speeds up the invoicing process but also sets the stage for quicker payments.

Automated Collections

Gone are the days of manual follow-ups for overdue payments. Automation enables you to automate the entire collections management workflow, from segmenting customers and prioritizing accounts to auto-sending correspondences based on the payment terms, significantly reducing the time and effort involved in collections.


Real-Time Payment Processing

Automated payment gateways facilitate real-time payment processing, which means you get to update your records instantly and improve cash flow. It supports multiple payment methods, including ACH, wire transfers, and credit cards, providing both you and your customers with flexibility.

Accurate Record-Keeping

Automation ensures that all transactions are recorded accurately and in real-time. This is particularly beneficial for cash reconciliation, wherein it automatically matches payments to open invoices, even when remittance information is missing or incomplete. This ensures that your records are always accurate and up-to-date.

Advanced Reporting and Analytics

Automation provides advanced reporting features, including real-time analytics. With predictive analytics, you can forecast cash flows, analyze customer payment behavior, and even predict potential bad debt, enabling data-driven decision-making.

Better Customer Experience

Automation enhances the customer experience by offering self-service options and instant pre-built responses. Customers can view invoice statuses, make payments, and raise disputes or queries, all through automated customer portals.

Cost Savings

By reducing manual labor and errors, automation can result in significant cost savings. The initial investment in an automated system is often quickly offset by the long-term benefits.

Enhanced Scalability

As your business grows, automation allows your accounts receivable process to scale seamlessly. You can handle a larger volume of transactions without a proportional increase in manpower or resources.

Elevate Your Accounts Receivable Process Flow with HighRadius

In a tight economic landscape, optimizing your accounts receivable process cycle is essential. Reducing DSO improves liquidity and frees up capital for business growth.

Why Choose HighRadius for Your AR Transformation?

HighRadius’s autonomous receivables offers a robust set of solutions designed to streamline and accelerate each stage of the accounts receivable cycle. Here’s how we can make a difference:

A Unified, Cloud-Based AR Platform

What distinguishes HighRadius is our integrated, cloud-based platform. This unified solution enables customers to:

  1. View invoices in real-time
  2. Make secure payments
  3. Engage directly with your team

The result? A streamlined accounts receivable process and an enhanced customer experience that fosters long-term relationships.

There’s much more to explore. Click here to learn more and dive deeper into how HighRadius can revolutionize your AR process.



What is the accounts receivable workflow?

An accounts receivable workflow outlines the steps for managing customer invoices from issuance to payment and reconciliation. It often includes invoicing, collections, payment processing, and cash application.

What is an aging report in accounts receivable?

An aging report categorizes accounts receivable by the length of time an invoice has been outstanding. It helps businesses identify overdue accounts and assess the effectiveness of their collections process.

How do you calculate accounts receivable turnover?

Accounts receivable turnover is calculated by dividing the net credit sales by the average accounts receivable during a specific period. It measures how efficiently a business collects its receivables.

Why do we manage accounts receivable?

Managing accounts receivable is crucial for maintaining healthy cash flow, minimizing bad debts, and fostering positive customer relationships. It directly impacts a company’s liquidity and financial health.

What is the difference between accounts receivable and accounts payable?

Accounts receivable represents money owed to a business for goods or services sold. Accounts payable is money a business owes to suppliers for goods or services purchased.

How do you track or monitor accounts receivable?

Tracking accounts receivable often involves using specialized software to monitor invoice statuses, payment due dates, and collections efforts. Key metrics like DSO and aging reports are commonly used.

How can small businesses manage accounts receivable effectively?

Small businesses can manage accounts receivable by issuing invoices promptly, setting clear payment terms, actively pursuing collections, and regularly reviewing key performance metrics.

If you want to learn more about how HighRadius can help your business achieve these benefits, talk to our experts today.

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