A step-by-step guide to the accounts receivables process

Every action, explained simply with flow charts and examples.

A woman looks at her receivables on her ipad

The accounts receivable process includes all steps from receiving an order to getting paid. It can be complex, but it is absolute crucial to manage it effectively for your company's financial health.

Below, we discuss what the AR process is, how you can measure its effectiveness, and how you can improve your process to enhance cash flow and improve you business operations.

Key takeaways

  • Accounts receivable is money owed to a business
  • The AR process starts with a request for goods/services to collecting payment
  • The AR process is crucial to maintaining your cash flow, working capital, and meeting your financial obligations
  • A successful AR process will minimize late payments, maintain accuracy, and encourage early payments
  • You can assess your AR process using metrics like DSO, AR turnover, and the average collection period
  • Automating your AR process improves efficiency, handles otherwise manual tasks, and minimizes errors

What is accounts receivable?

Accounts receivable (AR) are the funds owed to your business by customers for goods or services delivered but not yet paid for.

This amount is recorded as a current asset on your balance sheet, indicating that it is expected to be converted into cash within a year.

AR includes invoices issued to customers, credit sales, and other outstanding payments.

What is the accounts receivable process?

The accounts receivable process β€” also called AR process or receivable cycle β€” covers the steps to collect payments from customers for goods/services you've delivered.

This includes sending invoices, tracking payment due dates, and recording payments when they're received.

The process overall plays an important role in your overall business operations: understanding when money will come in β€” reliably β€” helps forecast future cash flows so you can plan investments, purchases, and other things to improve your business.

Why the AR process is so important

The accounts receivable process is important because it impacts your cash flow and liquidity.

An efficient AR process keeps cash coming into your business, meaning you can meet your own financial obligations and put your money where it can benefit your business most.

Explaned flow

The accounts receivable process explained

The accounts receivable process includes all steps for handling and recording receivables.

Step 1: Receive order

The AR process starts with receiving a purchase order, whether that be a B2C or B2B payment. Once the order is approved, an agreement called a sales order is created, which details all the information about the purchase.

Step 2: Credit approval

Assessing customer creditworthiness ensures payment for goods/services. Outstanding invoices can cause cash flow issues and hinder meeting your own financial obligations.

New customers

You should have a credit approval process that assesses the customer's trustworthiness and ability to pay for their requested goods or services. This credit approval for new customers should  take into account payment and credit history, capital, and current conditions.

Existing customers

It's vital you continue to monitor the creditworthiness of existing customers. Pay attention to any changes in behavior or patterns, to ensure you're not taking on extra risk.

Step 3: Send Invoices

The next step is to send the customer an invoice, which will detail how much money they owe and the payment terms. This includes the payment due date and any fees for late payments. This is the step when AR is recorded as a debit on the balance shit.

Step 4: Manage collections

Inevitably, you will end up with some late, unpaid invoices. It's then your goal to improve your chances of collecting money by having your staff follow up with the customer, and possibly escalating things if necessary.

Before reaching out to customers who are past due, ensure that the invoice was actually sent and is error-free.

You might want to review their payment history β€” if they're typically reliable then it might be a slip-up. Treat each case within the context of you and your customer's relationship.

Step 5: Address disputes

Issues with orders or incorrect invoices can cause disputes and late payments.

According to VersaPay, 50% of disputes are due to human error, so it's often best to understand the root cause before assuming the "worst."

It's crucial your team handles disputes early so payments aren't delayed and relationships are maintained.

Step 6: Process payments

Finally, receive payments by offering customers various payment methods to encourage timely payments.

Different types of payments

  • Credit cards. A credit card are, of course, a very popular way to make payments for various things. They offer convenience and the ability to build credit, but can have high processing fees.

  • ACH. Automated Clearing House, or ACH, is an electronic fund transfer between bank accounts. ACH payments are secure, convenient, and often cheaper to process, but have slower processing times.

  • EFT. Electronic Funds transfer, or EFT, is a digital money transfer between bank accounts. EFTs are cost-effective and faster to process, but can have higher transaction fees. Read more about the differences of EFT and ACH payments.

  • Checks and echecks. Paper checks are a traditional payment method that physically sends bank information to then facilitate a transfer of funds. EChecks are similar to paper checks, but the transfer of information is done digitally. This payment method is reliable and cost-effective, but can have slower processing times. Learn how accept check payments online.

  • Wire transfers: Wire transfers are electronic funds transfers known for their speed and reliability, often completed within the same day. They can be more expensive due to higher transaction fees for both the sender and receiver and are commonly used for large, urgent payments.

Once a payment has been received you'll have to record the revenue and reconcile it in your accounting software.

On your balance sheet, credit accounts receivable to decrease it and debit your revenue account by the same amount.

What does success look like in the AR process?

A successful AR process collects payments efficiently and on time, meaning cash flow and working capital are predictable and reliable.

Signs of an efficiently managed AR process include:

  • A high rate of early payments
  • Invoices are accurately sent in a timely manner
  • Minimal late payments
  • Policies are proactive with late payments

GoTrainGo: A hypothetical example of a good vs. bad AR process

Imagine GoTrainGo is a leading train manufacturing company known for its innovative and eco-friendly train designs.

Founded in 2005, the company has rapidly grown to become a key player in the global train manufacturing industry.

They specialize in high-speed rail systems and environmentally sustainable engines, aiming to change rail transport with cutting-edge technology and superior performance.

An example of a good AR process

GoTrainGo has a robust accounts receivable (AR) process. They send accurate invoices immediately after delivering trains and follow up on outstanding invoices promptly. They also use an automated system to manage receivables, reducing errors and ensuring timely payments.

βœ… The benefits 

With a reliable AR process, GoTrainGo enjoys predictable cash flow. This allows them to:

  • Invest in innovation. GoTrainGo can fund R&D into advanced train technologies like high-speed rail systems and eco-friendly engines.

  • Expand operations. They can also invest in new manufacturing facilities, purchase high-quality steel and other materials, and poach top-notch engineers from their competitors.

  • Maintain financial health: Perhaps most importantly, they can meet financial obligations on time, avoiding cash flow shortages and ensuring smooth operations.

βœ… The results 

Accurate invoicing and timely payments lead to high customer satisfaction, fostering positive relationships and repeat business. With financial stability, GoTrainGo can continuously innovate and expand, enhancing its reputation in the market. Steady cash flow supports consistent business growth and market expansion, positioning GoTrainGo as a leader in the train manufacturing industry.


An example of a bad AR process

On the flip side, GoTrainGo struggles with a poor AR process. Invoices are often late or incorrect, leading to disputes and delayed payments. The understaffed AR team lacks proper tools, causing inefficiencies.

❌ The negative impacts of a poor AR process 

As a result of their process, GoTrainGo has an unpredictable cash flow, which results in:

  • Operational disruptions. Cash shortages delay GoTrainGo's payments to their main steel supplier and to their employees, disrupting production schedules and lowering morale.

  • Limited investment. They also can't invest in a new cutting-edge high-efficiency engine and are forced to focus on tweaking older engine types.

  • Increased borrowing. Their reliance on short-term loans increases financial burden and interest expenses, snowballing into more problems down the line.

❌ Results 

Invoice disputes and delays damage customer relationships, leading to lost business and dissatisfaction. Cash flow issues and increased borrowing costs strain GoTrainGo's financial health, making it difficult to maintain operations.

Without the ability to invest in essential engine tech, GoTrainGo falls behind competitors, losing market share and failing to secure future contracts.

The top metrics and KPI to measure the success of your AR process

Monitoring your AR performance can be a key insight into your company's financial health. Some of the stats you should keep an eye on include:

AR turnover ratio

Your AR turnover ratio measures how effectively your business collects debt and extends credit. AR turnover ratio is calculated by dividing your net credit sales by your average accounts receivable. The higher your ratio is, the better.

Expected cash collections

Expected cash collections calculate the projected amount of cash to be received during a period. To calculate your expected cash collection, add your cash sales and estimated AR collections.

To estimate your AR collections, first deduct the expected amount of receivables you won't collect. Then group your receivables into 30, 60, and 90 days buckets. Analyze your average payment history to create an AR aging report, which will give you an estimate of the rate of collection for each bucket. Finally, multiply your collection rate by the receivables balance in each bucket.

Average collection period

Average collection period measures the average time it takes to collect a payment that is owed.

Calculate the average collection period by dividing. a yearly accounts receivable balance by yearly total net sales, then multiplying by 365 to get the number of days.

Days sales outstanding

The days sales outstanding, or DSO, calculates the average number of days it takes a company to receive payment.

To find your DSO, divide your total AR by the total credit sales in the same period, then multiply the result by the number of days in the period.

Collection effectiveness index

The collection effectiveness index measures how effective a company is at collecting payments on time. To find this number, divide the company's total AR by its total sales.

Average days delinquent

Average days delinquent, or ADD, represents the average amount of days payments are overdue.

You can use ADD to analyze the trends of your AR effectiveness and your customers' creditworthiness.

This may sound similar to DSO, but DSO looks at how long on average customers take to make a payment, whereas ADD only looks at payments that are late.

1. To find the average days delinquent, firstly calculate your DSO:

DSO = (Accounts Receivable Γ· Total Net Credit Sales) x Number of Days in Period)

2. Then, find the best possible DSO (BPDSO):

BPDSO = (Current Receivables x Number of Days in Period) Γ· Credit Sales for Period

3. Finally subtract your BPDSO from your DSO:


Number of revised invoices

The number of revised invoices looks at how many invoices your team has had to revise in a period. This can help you determine your process' accuracy.

To find the number of revised invoices, simply count how many invoices had to be modified within any given period.

Percentage of bad debt

Bad debt represents money owed by customers that is uncollectible. It is inevitable that you'll run into some bad debt, so it's crucial you understand how to manage it.

To calculate your percentage of bad debt:

% of Bad Debt = Total Bad Debts / Total Credit Sales (or Total Accounts Receivable)

Once you've calculated your rate apply it to your current credit sales to estimate how much of your AR would be allocated to a bad debt allowance account.

This figure helps you understand how effective your collection process is. Aim to keep your bad debt percentage as low as possible.

Staff productivity

Staff productivity shows how effective your AR collection process is compared to the effort your staff puts in.

Calculate it by dividing the number of goods or services produced by the total hours worked during a set period.

Customer satisfaction

Monitor customer satisfaction to ensure throughout your AR collections process you are maintaining positive relationships with customers.

Benefits of a good AR process: security, speed, consistency, accuracy, better cash management

Benefits of automating accounts receivables cycle

Security and compliance

Automating your AR process will make it digitized, often on a cloud-based solution. Cloud-based solutions centralize your data so you don't have to worry about lost documents and offer extra security by encrypting your information.

Additionally, a digital process creates a trackable trail for your AR that you can use for audits and reporting.

Speed and efficiency

Automation improves the speed and efficiency of your AR process by handling tedious tasks. For example, Plooto Capture streamlines your invoice management by automatically uploads invoice data, saving time on manual entry.

Consistency and accuracy

By taking over manual tasks, which are often error-prone, this improves the accuracy at which your AR process is completed. Automation also helps keep your process consistent by enabling you to create standardized policies and an improvement in accuracy.

Cash management

When your AR process is automated, you can better predict cash inflows, leading to improved forecasting and budgeting.

Accounts receivable best practices

Every AR process is slightly different, and different companies should do what works best for them. But there are still some basic best practices to follow that will get any company moving in the right direction.

Provide an estimate/quote

Before signing a sales order, consider sending the customer a quote which includes the goods/services to be sold, the price and payment terms. This can help customers have a better estimate how much they owe and when they owe it, so they can better prepare for sending a payment. This can also help speed up the invoice approval on their end.

Create a follow-up policy

Establish clear communication points with customers regarding their payments. This often includes sending reminders before their due date and following up when payments are overdue.

Standardized policies help minimize bad debt and keep your customer relationships positive.

Establish key performance indicators

Establish KPIs for your team that can help you improve the efficiency of your process.

For example, you might aim for a minimum AR turnover ratio that meets your industry's standard, or a lower average days delinquent to help improve your collections process. 


What is the accounts receivable process workflow?

The AR process encompasses all the steps from receiving an order for goods/services, to collecting payment.

What is accounts receivable classified as?

Accounts receivable is classified as a current asset on your balance sheet.

How to streamline the accounts receivable process?

Your AR process can greatly benefit from automation. It can streamline the steps needed, minimize errors and reduce the effort needed to manage AR.

Is it a good idea to outsource the accounts receivable process?

Outsourcing your AR process can be a great way to speed up and add efficiency to your process without adding extra workload. 

Learn more about accounts receivable

Money coming in vs money going back out

Accounts receivables vs. accounts payables: What’s the difference?

Read more >
A woman reviewing her payables at the office

The accounts payable process: Everything you need to know

Read more >
A man in a yellow shirt and glasses works on his computer at the office

What's accounts receivable automation? The complete guide

Read more >

Automation your entire AR process β€” for free, starting today.

With Plooto's accounts receivable and payment automation, you can stop worrying about manual errors or unnecessary delays. Sign up for a free trial and master your cash flow.

Start free trial