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The traditional accounts receivable process sounds like a complex process of accounting, but it’s not. When you boil it down to its essence, accounts receivable is an IOU. 

When you offer customers goods and services on credit to grow your business, your accounts receivable is a record of what’s owed to you and when. While this is a simple process in principle, keeping track of your accounts receivable cycle becomes complicated when you have a lot of customers or clients. It’s a great problem to have — but it’s also one that can affect cash flow if you don’t have an optimal process for collecting what’s owed to you. 


Keep reading to find out how to set up a successful accounts receivable process, in addition to common challenges and opportunities for automation. 


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Who uses accounts receivables?

Any business that uses accrual accounting as opposed to cash-basis accounting uses accounts receivable to keep track of money owed to them. 


For many small businesses, it may be the owner who takes care of accounts receivable — but as you grow, this won’t be ideal. Accounts receivable is an administrative financial process that should be delegated and/or automated so you can focus on growing your business through relationships, good service, and marketing. 


For mid-sized or large businesses, accounts receivable departments exist to handle the day-to-day tasks of sending invoices, tracking financials, and receiving payments. The team may look like this:

  • Accounts receivable officer/manager
  • Credit and billing analysts
  • Collections and disputes analysts

What are common accounts receivable challenges?

Running a small- to mid-sized business comes with some challenges. Here are some of the most common challenges — and solutions — of an accounts receivable process:


1. Late payments 

According to a May 2021 survey by Melio and YouGov, 25% of small businesses wait between 20–30 days past an invoice due date to receive payment. Of those businesses (that wait for outstanding invoices), 40% have considered delaying hiring, 39% have delayed purchasing inventory, and 36% are cutting employees’ hours. 


Solution: Use accounting software that automates payment follow up with reminders that are sent upon due date and afterward at regular intervals. 


2. Anticipating bad debt

Accounts receivable is considered an asset on your balance sheet. At first glance, you may look at a high accounts receivable number and feel great about all the cash you’ll soon see in your bank account. 


But if that number is too high, it means your cash flow isn’t healthy or that you can’t collect on certain accounts. This is why anticipating bad debt is so important — you need to be realistic about your bad debt so that you can make informed decisions about business expenses. 


Solution: The best solution is time and discipline. After a few years in business, you’ll notice bad debt trends — but only if you're diligent about your financial reporting.   


Learn more about how to record accounts receivable and other assets and liabilities on your balance sheet. 


3. Data errors

Open invoice and paid invoice errors happen all the time. If you record the wrong number of items on an open invoice, your customers may no longer trust you. If your customer pays the wrong amount, they may not trust you and you may lose money. This is also a major issue during the accounts payable process.


Solution: Minimize errors by adopting an accounting software solution. You may not be able to eliminate errors completely, but you can decrease them by duplicating invoices and editing them rather than creating invoices from scratch in a way that doesn’t integrate with your financial reports. 


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How was accounts receivable done in the past and how has it modernized? 

Before the 1990s, accounts receivable was done on paper. That meant companies generated paper invoices, sent them to customers, stored duplicates in file cabinets, and recorded data in ledgers by hand.


When business management software started to take off alongside the widespread adoption of the internet, most companies were able to centralize their accounts receivable process and send documents electronically. 


Then in the mid-aughts, cloud computing sparked software integrations that allowed different departments to share and centralize information in ways they never could before — and at low costs. 


Payment technology and advancement in digital payments encryption have now made it easy for businesses to accept payments online without the need for special equipment or expensive software. 


It’s this combination of low-cost digital payment solutions and cloud computing for accounting software that makes it simple for businesses to automate their accounts receivable process. When two pieces of software can share data through the cloud, data entry errors are nearly eliminated while making it easier to make sense of financial reporting in real-time.  


Plooto’s software, for instance, communicates with accounting software like Xero and Quickbooks to eliminate the need for manual data entry. It’s these kinds of integrations that save time for bookkeepers, accountants, and business owners. 


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What are the pros to accounts receivable automation?

Accounts receivable automation means using accounting software like Quickbooks to send invoices alongside a payments solution to receive and keep track of payments. The two pieces of software should talk to each other and sync data to save you time on manual data entry. 


Pros of accounts receivable automation

  • Time savings with less manual data entry and paperwork
  • Auto-reconciliation of accounts for decreased accounting errors
  • Easy financial reporting for teams across your organization
  • Automated approval processes
  • Better customer relationships due to saving time and automated communication

Accounts receivable automation is fast becoming standard as businesses continue to operate remotely as much as possible. When you eliminate paper from your business operations, you’re becoming more efficient, environmentally friendly, and ready to serve more customers beyond your own backyard. 


When you perfect your accounts receivable and accounts payables, you're headed toward a perfect cash flow process.


How to create a flawless accounts receivable process

The ideal accounts receivable process balances your customers’ needs — the time you’ve granted them to pay you — and your need to keep your cash flow flowing. 

Your accounts receivable process will depend on the size of your business and your finance team, but overall there are five steps:

  1. Setting credit terms
  2. Creating a PAD agreement (optional but recommended)
  3. Sending invoices
  4. Ongoing tracking of accounts receivable
  5. Posting payments

Step 1: Set credit terms with your customers

Your credit terms are a contract with your customer that specifies the time between invoice and payment, interest upon late payment, and other details about both businesses. 


The larger your business, the longer you can afford to wait for your customers to pay you. Small- to mid-sized businesses usually set payment terms at 30, 60, or 90 days, depending on their growth rate and cash flow.


Your credit terms for your customers should include the following:

✔️ Company information: legal business name, billing address, mailing address, and business type

✔️ Contact information for your accounts payable

✔️ Currency

✔️ Payment terms: 30, 60, or 90 days (or longer for larger businesses)

✔️ Interest on late payments — talk to your customers about this so they understand

✔️ Payment method

✔️ Other contact information for payment or service delivery

✔️ Signature and date


Tip for small businesses: When you’re just starting your business, your priority is to get paid fast. Set terms no later than net 30 days with your customers. 


Step 2: Create a pre-authorized debit (PAD) agreement (optional but recommended for repeat business)

If you’re offering a subscription or any other kind of repeat business, a PAD agreement that sets up recurring payments may make sense. PAD agreements are a great way to make sure you get paid on time because the customer is “setting it and forgetting it” when it comes to their payment.  


You can set up a PAD agreement through an automated payment platform, through which the customer authorizes payments to be taken from their bank account automatically based on your credit terms. When a payment is made, the record will then sync back to your accounting software for automatic reconciliation.


Tip for small businesses: Incentivize customers to sign PAD agreements by offering a discount — but only if your cash flow can handle it. 




Step 3: Send your invoice

After you’ve delivered your end of the bargain with your customer, it’s time to send an invoice. We recommend using accounting software like QuickBooks or Xero to make the process easier. 


Your invoice should include:

✔️ Your company’s basic information

✔️ The customer’s company’s basic information

✔️ Contact information for your accounts payable

✔️ Balance due, including taxes

✔️ Reminder of terms (30, 60, or 90 days)

✔️ Invoice date

✔️ Balance due date

✔️ Line items describing products or services rendered 




Tip for small businesses: Use accounting software that automates follow up. Most accounting software solutions include features that let you write and schedule automated reminders to customers upon due date, three days later, one week later, etc.


Step 4: Track accounts receivables for better cash flow

If your business is growing and you’re sending a lot of invoices, you’ll need to start tracking your accounts receivable to optimize your cash flow. That means tracking what’s called “bad debt.”  


Bad debt is lost revenue for services you’ve provided that customers can’t pay for, either because of miscommunication, bankruptcy, or a host of other bad business practices. 


But the good news is that, after a certain period of time, you’ll see trends in what you can’t collect — and you’ll anticipate this number in your financial statements as an “allowance for uncollectible accounts.” 


Use this formula: Let’s say your business makes an average of $300,000 per year. You also know that you usually can’t collect an average of 3% of your accounts receivable during any given year. 


To estimate your bad debt, multiply your total sales by 3% ($300,000 x 0.03). You would then credit $9,000 to allowance for uncollectible accounts, and debit the same amount as bad debt expense.


Tip for small businesses: Skip the manual tracking of your accounts receivable turnover ratio — how fast you’re getting paid on average — and adopt an automated payment solution that can tell you at a glance how long your customers are taking to pay you.


Step 5: Accept payments from customers

Now it’s time in the collections process paid. You can always accept checks, but make sure you’re set up to accept as many forms of payment as possible, including credit card, e-transfers, ACH payments, EFT payments, etc.


Tip for small businesses: Accept online payments through an automated payment platform that syncs with accounting software instead of manual entry. Automated payments with accounting software integrations save companies an average of 20-40 hours per week. 

Go back to the table of contents.


00   The Complete Guide to Improving Your Business with Accounts Receivable

01   Accounts Receivables and Assets Explained

02  Accounts Receivable vs. Accounts Payable: What's the Difference?

03  What Is the Accounts Receivable Process?

04  Setting Up an AR Process; Get Paid Faster & Increase Cash Flow

05  Make it Simple to Receive Payments from Your Customers


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