Accounts Receivable Collections Best Practices and Process

Despite steady sales, a business may still face cash flow issues if it lacks effective management of accounts receivable. Poor cash flow can slow or even halt a company's growth and lead to greater challenges over time. For example, a business may struggle to pay vendors, employees, or meet loan obligations. In some cases, it may even be forced to turn down growth opportunities due to a lack of available cash.

In contrast, a strong accounts receivable collection process allows steady revenue and strong customer relationships. There's more scope for the business to expand or upgrade its technology and equipment. Businesses that efficiently manage their accounts receivable (AR) have clear processes in place for collecting payments. They also watch for potential cash flow problems and address them early, before they can harm the business.

Intuit QuickBooks reports that small and medium-sized businesses (SMBs) in the UK are currently owed an average of £27,214 in late payments¹. Figures like this make it essential for UK entrepreneurs to be more vigilant. A large sum of outstanding payment can be financially crippling.

This guide covers the best practices for accounts receivable collections so that you can make better decisions for your UK business. It also touches on Wise Business, a cost-effective way to send business payments and receive money from abroad in multiple currencies, with conversions using the mid-market exchange rate.

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What Are Accounts Receivable Collections?

Accounts receivable collections are the steps a business takes to recover money that customers owe for goods or services they have received. This includes following up on overdue invoices, missed payments, or any credit agreements made with customers.

This process is often referred to as accounts receivable follow-up or accounts receivable recovery. It involves sending payment reminders, staying in touch with customers, tracking outstanding balances, and sometimes taking more drastic actions if payments remain unpaid.

Here is a precise breakdown of the steps involved when collecting accounts receivable:

1. Invoice promptly: Send clear, detailed invoices as soon as goods or services are delivered.
2. Monitor accounts regularly: Keep track of outstanding invoices and aging reports.
3. Send reminders: Issue polite payment reminders before and after the due date.
4. Contact customers: Follow up with phone calls or emails if payments are overdue.
5. Negotiate payment plans (if needed): Offer structured payment options for struggling customers.
6. Escalate when necessary: Engage collection agencies or take legal action for seriously delinquent accounts.
7. Update records: Record all communications and payment updates accurately in the system.

It's highly essential for a business, regardless of its size, to keep a close watch on its finances. Collecting accounts receivable is one way to keep finances firm.

Importance of Accounts Receivable Collection Process

It's quite clear that managing accounts receivable is key to keeping your business financially strong. Here's more on why a solid process to collect accounts receivable matters:

• A strong accounts receivable system ensures steady cash flow and liquidity. This helps you pay bills, cover daily expenses, and invest in growth.
• Metrics like the accounts receivable collection period show how quickly you get paid. A shorter collection period means healthier cash flow and better financial management.
• Clear invoicing, flexible terms, and regular follow-ups make payment easy for customers. It encourages long-term loyalty.
• AR data helps you spot trends in customer payments, assess credit risk, and fine-tune your cash flow strategies for sustainable growth.

In the UK, the importance of efficient AR collection is underscored by the fact that 73% of businesses experience negative consequences due to late invoices². Implementing effective accounts receivable management can support growth, no matter the industry.

How Do You Effectively Collect Accounts Receivable?

A smooth accounts receivable process helps keep your cash flow healthy and ensures customers pay on time. An effective AR process usually involves:

Automate and Streamline Your Receivables

Using automation makes it easier to get paid faster by automatically sending invoice reminders, recurring invoices, and matching payments quickly. This helps speed up cash posting and keeps your cash flow strong.

Setting clear expectations from the start is also key. Ensure that customers know exactly when payments are due, how much they owe, and the payment method. Having this conversation early helps shorten your accounts receivable collection period and avoids confusion later.

Typically, you should have this discussion when a new customer signs on, if you update your collection process, or if a customer regularly misses payment deadlines.

Make it Easy for Clients to Pay

One of the best ways to improve accounts receivable collections is by making invoice payments simple and hassle-free for your clients. Start by ensuring that your invoices are clear, complete, and free of any missing details that could cause payment delays.

You can also speed up collections by offering electronic payment options, such as ACH transfers, so customers can pay directly and boost your cash flow without delays. Another option is setting up a lockbox service through your bank. This is where checks are sent to a special address and deposited quickly, reducing waiting time.

It's a good idea to speak with your bank or industry peers to find the right cash management tools for your business.

Monitor the Right KPIs

Even the best strategies won't work if they aren't being followed properly. As part of accounts receivable collections best practices, it's important to regularly review key performance indicators to spot what's working and what's not.

The main KPIs to track:

• Accounts Receivable Turnover (ART): Shows how often you collect your average receivables in a year. A higher number means faster collections.
• Average Days Delinquent (ADD): Measures how long it takes to close an invoice compared to how long it should take.
• Collections Efficiency Index (CEI): Tracks the percentage of receivables you successfully collect over a set time.
• Days Deductions Outstanding (DDO): Measures the average time spent resolving customer disputes.
• Days Sales Outstanding (DSO): Tells you how quickly customers are paying their invoices. A lower number is better.
• Number of Revised Invoices: Frequent invoice changes may signal bigger issues in your billing process.

Create Clear Credit and Collection Rules

If you plan to offer credit to clients, make sure you have clear rules in place. This helps you avoid giving too much credit and makes it easy for your team to decide when to approve or deny credit requests.

The same goes for your accounts receivable collections process. A good collection policy focuses on being proactive, not reactive. Instead of only chasing late payments, send friendly payment reminders before the due date to keep customers on track.

If a customer already has overdue invoices, use your next invoice as an opportunity to list all outstanding amounts. This keeps things clear for the customer and speeds up the collection process.

Involve All Teams in the Collection Process

A survey found that 90% of respondents believe sales teams should not be involved in cash collection³. This misconception overlooks the fact that sales teams play a crucial role in converting deals into cash and generating working capital. They directly interact with customers at key collection points. This ensures that payments are on time.

Not only this, but involving all client-facing teams helps avoid errors, reduce redundancy, and improve communication, leading to faster payments. However, if payments are delayed, the issue may go beyond technical problems. Sales and customer success teams can help identify the root cause and offer solutions.

This proves that collecting accounts receivable isn't only a finance team's responsibility. It's a collective task that requires input from multiple departments.

At the end of the day, if all collection attempts fail, consider collaborating with a collection agency. Although it may not be the perfect solution, it can help you recover some of your overdue payments and keep your cash flow steady.

How Does an Automated Accounts Receivable Workflow Management Tool Help?

Managing all these processes, metrics, and reports takes a lot of effort. Traditional businesses rely on manual staff work to handle invoicing and collections. Meanwhile, modern businesses use automated AR software to reduce human involvement and streamline the process.

The perks they experience with automating the systems are:

FAQs - Accounts Receivable Collections Best Practices and Process

Here are some commonly asked questions:

What does the accounts receivable process mean?

The purpose of the accounts receivable process is to ensure that businesses receive payments on time. It intends to keep invoices from becoming overdue. This helps maintain steady cash flow and supports the business's profitability.

Why are accounts receivable important?

Accounts receivable (AR) play a key role in managing working capital and influencing business relationships. Effective AR management boosts liquidity, improves operations, and increases customer satisfaction.

What is the most effective collection strategy?

The most successful collection strategy involves taking early action, offering flexible payment options, and maintaining open and clear communication. It should focus on understanding the customer's needs and provide financial guidance to ensure a positive outcome for both parties.

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Sources used:

Sources last checked on date: 05-Jun-2025

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