Accounts Receivable Management Best Practices

Given the high cost of acquiring new capital, your business can’t afford to have its cash flow tied up in outstanding invoices. Proper accounts receivable management is how you fix this by unlocking the liquidity needed to fuel growth and maximise shareholder returns. In some cases, it can even give you an edge over your competitors.

This article will explore best practices for managing accounts receivable, specifically for businesses in the UK. Plus, it’ll also mention 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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Table of contents

What is accounts receivable management, and how does it work? Why is accounts receivable management important? Accounts receivable best practices Set clear AR management Policy terms Automate Set KPIs that are not restricted to Days Sales Outstanding (DSO) Make it easy for customers to pay you Accounts receivable challenges Late payments Cross-Border Payment Delays and Currency Conversion Costs Not sticking to your AR management policy Inaccurate invoices Poor communication Inadequate report and analytics Decrease in accounts receivable - what does it mean? Increase accounts receivable - what does it mean? How to manage accounts receivable? How to create an accounts receivable policy FAQs: accounts receivable management What is the best KPI for accounts receivable? Is accrued revenue the same as accounts receivable? Receive international payments with Wise Business

What is accounts receivable management, and how does it work?

Let’s say you run an electricity distribution company with a 30-day payment policy. After supplying power to your customers, you issue an invoice outlining the payment terms and the amount due. Until the customer pays, this amount is considered accounts receivable (AR).

The entire process of overseeing, tracking, and collecting the amount owed while maintaining communication is accounts receivable management. This is important because any business will benefit from prompt payment collection because it sustains cash flow and controls bad debts. For this to happen, you must carry out some accounts receivable functions, including invoicing customers, tracking payments, following up on overdue accounts, and reconciling payments.

Most companies either use a spreadsheet or accounting software to manage their ageing accounts. An ageing account is the list of customers owing, and this list typically includes the company name, invoice number(s), the outstanding amount, the date the balance is due, and, if the payment is late, how many days are past due.

Understanding AR management is one thing - knowing why it matters is another. Let’s explore its impact on financial health.

Why is accounts receivable management important?

Small business owners in the UK spent 56.4 million hours annually pursuing unpaid invoices¹. AR management frees up time for better business activities. Effective automation, along with upfront payment expectations, should become your main objectives. According to research by Xero on small businesses, 50% of small businesses are paid late, costing an estimated £1.6bn in 2023².

The successful management of accounts receivable operates beyond simple payment collection to function as a strategic corporate asset. Efficient AR management helps companies achieve financial stability through smooth cash flow and lowered borrowing needs. It also makes their financial projections more accurate. Businesses that monitor their accounts receivable effectively detect credit risks sooner, which leads to better financial results.

Under the Late Payment of Commercial Debts (Interest) Act 1998³, UK businesses can charge statutory interest (8% plus the Bank of England base rate) on overdue invoices. They can also claim compensation for debt recovery costs. Despite these protections, many small businesses hesitate to enforce them, contributing to the ongoing issue of late payments.

Now that you know the importance of AR management, we will discuss the best ways to practice it in the next section.

Accounts receivable best practices

When it comes to managing accounts receivable, using best practices can make a world of difference. Using the best practices goes beyond collecting money on time. It's a way to set up systems and processes that ensure a steady cash flow, improve efficiency, and reduce stress. Below are the best practices to keep your AR in check:

Set clear AR management Policy terms

The sales and finance team needs to come together to create AR policies that align with market realities without limiting cash flow. This policy should clear a set of terms that dictate billing cycles, collection timelines, and credit extension criteria. For example, if a new customer buys low-volume products from you on a short-term basis, then a simple internal scorecard can be used to assess creditworthiness.

However, if a customer requests large, ongoing credit, businesses should conduct a full background and credit history check in a reasonable time frame. This policy should also set responsibility for who should approve credit. Don’t leave this at the discretion of your sales team, as they might often grant credit or override terms to make sales faster.

Automate

Integrate automation into your entire account receivable process, starting with automation in the approval process. For example, you can determine creditworthiness based on predefined risk metrics. Generate internal scorecards for small customers and flag large-volume customers for manual review. You can also automate the approval and rejection system and set alerts for high-risk industries/customers whose financial conditions may be deteriorating.

Store and manage credit applications, financial statements, and contract terms in a centralised digital system. Most importantly, weave automation into your billing system. Incorrect invoices lead to disputes, which lead to weak enforcement. So strengthen the process by pulling payment terms, addresses, and discount details from a master database. Set up automated payment reminders (email, SMS, or phone calls) for upcoming due dates. Increase urgency with tiered reminders (e.g., 5 days before due, on due date, 7 days overdue, 15 days overdue).

Set KPIs that are not restricted to Days Sales Outstanding (DSO)

While DSO is a key metric, it doesn’t reveal why payments are delayed or how efficiently collections are handled. Tracking additional KPIs provides deeper insights into payment behaviour, policy enforcement, and cash flow health. Here are some examples of other KPIs that should be tracked, along with how they help:

• Past-due percentage highlights how much of the receivables are overdue, helping businesses assess collection efficiency.
• The invoice exception rate identifies errors and disputes that delay payments, ensuring invoicing accuracy.
• The collection effectiveness index (CEI) measures how successfully receivables are recovered within a given period, reflecting the strength of collection strategies.
• An unapproved discount rate reveals revenue leakage caused by unauthorised price reductions.
• Customer overrides frequency flag instances where sales teams bypass standard payment terms, increasing credit risk.
• Write-off percentage tracks receivables that become bad debt, signalling the need for stricter credit approvals or improved collections.

Make it easy for customers to pay you

Your payment options should be flexible to meet customers’ needs. Many customers need payment choices beyond bank transfers or checks. Offering multiple payment methods makes it easier for your clients to pay you, and the more options they have, the more likely you are to get paid quickly.

Accounts receivable challenges

Accounts receivable challenges impact cash flow and operational efficiency. Identifying these issues is the first step toward solving them. Below are some of the most common accounts receivable challenges.

Late payments

Customers often miss payment deadlines, which can lead to cash flow problems and additional time spent chasing overdue accounts. The UK Government has implemented several measures to tackle late payments, including the Fair Payment Code⁴, which encourages large businesses to pay small suppliers within 30 days. However, adherence is voluntary, and many businesses still struggle to enforce timely payments.

Cross-Border Payment Delays and Currency Conversion Costs

One major challenge for UK businesses managing accounts receivable is dealing with cross-border payment delays and high currency conversion fees. Businesses that operate internationally often experience longer settlement times when receiving payments from overseas clients due to banking intermediaries, varying processing times, and exchange rate fluctuations. These delays can create cash flow gaps, making it harder for businesses to meet their own financial obligations on time.

Not sticking to your AR management policy

Unfortunately, some businesses get caught on chasing sales at the expense of enforcing policies effectively, while others have no AR policy altogether.

Inaccurate invoices

Mistakes on invoices can cause disputes and payment delays. This dispute can be due to payment conditions or service delivery schedules, which often slow down payments.

Poor communication

Poor communication between teams can lead to missed payments. It’s important to disclose your AR policy at the point of sale or during negotiations. It’s also a best practice to include this in your contract.

Inadequate report and analytics

Relying on manual AR tracking, such as Excel spreadsheets, reduces visibility, limits actionable insights, and increases the risk of errors. Thereby hindering proactive decision-making and resulting in missed opportunities for financial optimisation

Decrease in accounts receivable - what does it mean?

A decrease in accounts receivable occurs when businesses collect AR faster than they extend new credit sales. When customers settle their debts quickly, the business receives cash payments faster from its credit sales arrangements. It boosts available cash and decreases financial risks to create better business stability. Businesses can use their available working capital to support operations and growth when they collect payments sooner.

While a decrease in AR usually means faster payments, a sharp drop could signal declining sales, suggesting weaker demand or stricter credit policies. You need to examine accounts receivable records to interpret results correctly.

Increase accounts receivable - what does it mean?

An increase in accounts receivable most often appears when business sales expand faster than customers pay their bills.

UK businesses face a challenging situation when accounts receivable numbers go up. Higher sales and business expansion are the main benefits associated with increasing accounts receivable. Growing sales through credit purchases helps businesses grow their customer network.

An increase in AR can be good and bad. It’s good when it means an increase in sales but bad when it hurts cash flow due to delayed invoice payments. Having too many unpaid invoices blocks money from being used for essential business requirements and stops funds from going to suppliers as well as future investments. Companies face more bad debts because their customers do not pay on time or at all. Businesses need to monitor their incoming payments closely and take action when payment terms are not met.

How to manage accounts receivable?

Proper management of AR stabilises cash flow and limits financial risk. Set clear credit policies from the beginning and conduct credit checks to avoid high-risk clients.

You should also send invoices promptly with clear instructions for payment. This reduces errors and speeds up the collection process.

Furthermore, you should have good internal controls for accounts receivable to prevent fraud and discrepancies. Extra security comes in the form of regular reconciliations and approval processes. You should also use ageing reports to track receivables to identify overdue accounts early.

How to create an accounts receivable policy

An organised AR policy lets businesses control their available funds while reducing overdue payments and reducing bad debt. Use these steps to build a successful accounts receivable policy:

• Establish standard rules for giving credit to customers. Check if customers can pay their bills and determine their payment record and creditworthy status
• Set your payment terms, explain accepted payment options, and give discounts to people who pay earlier. State all fines and penalties related to late payments
• Keep all invoice information direct by showing when payment is due along with precise itemised costs and steps to make payments plus contact numbers. Send invoices without delay to prevent any delays in processing.
• Set reminder schedules to start before the due date, continue on the due date, and when payments are late. Use automatic reminder systems to improve our collection process
• Enforce late payment penalties by collecting lateness fees. Customers pay their bills faster when this system is in place, and it lowers the number of unpaid accounts
• Document and communicate the policy to all staff and customers

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FAQs: accounts receivable management

Here are some commonly-asked questions:

What is the best KPI for accounts receivable?

The AR Turnover Ratio stands out as a good KPI because it shows how well a business handles collecting money from sales. When the ratio value rises, a business's credit control system works well because this indicates quick payment processing and effective debt management. Use DSO along with the ageing report to monitor how quickly you collect payments from customers.

Is accrued revenue the same as accounts receivable?

Accounts receivable and accrued revenue are related but not the same. Accounts receivable is revenue that is billed but not yet paid, while accrued revenue is revenue that has been earned but not yet billed. Accounts receivable follow invoicing, but accrued revenue comes before the invoice. They are both assets, but accrued revenue is an accrued asset, whereas accounts receivable is a current asset.

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Sources used:

1. Intuit Quickbooks website: UK Small businesses
2. Xero Press Release: Xero unleashes a wave of product innovation at Xerocon London
3. https://www.legislation.gov.uk/ukpga/1998/20/contents - Late Payment of Commercial Debts (Interest) Act 1998
4. https://www.smallbusinesscommissioner.gov.uk/fpc/fair-payment-code/ - Fair Payment Code

Sources last checked on date: 28-Jun-2025.