Accounts Receivable Process Step-by-Step

Accounts receivable processes have the most powerful impact on any business. Even though the job of the AR team seems to be simple, it has its fair share of struggles and complexities. Validating invoices, monitoring for fraud, dunning, and managing payment details is anything but easy.

With so many factors at play, monitoring the accounts receivable processes and procedures can consume most of your account team’s time. But, deploying the right strategies and technologies can make the daunting work more manageable and errorless. In this guide, we’ll walk you through the accounts receivables cycle in the UK, the potential challenges, and quick tips to improve the process.

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What is the accounts receivable process?

Accounts receivable processing is a system with multiple layers. It involves a series of actions that a company takes to schedule payments, invoice clients, and secure funds for goods or services. And although AR is an asset on the balance sheet, converting it into cash as quickly as possible can help maintain a positive cash flow.

Basically, these are the payments the customer hasn’t paid at the time of the transaction. Instead, the business extends the credit and expects to receive payments for the transaction in an agreed-upon timeframe.

Several steps in the accounts receivable workflow involve informing customers about their outstanding payments, tracking them, and ensuring the full amount is received. Here’s a use case example of how a SaaS (Software as a service) company can handle the accounts receivable process flow:

Company Name: XYZ SaaS Solutions
Task: XYZ SaaS provides cloud-based accounting software to businesses. It offers a subscription plan, with customers billed monthly.

• Issuing an invoice: On January 1st, XYZ SaaS sent ABC Corp a $500 invoice for their monthly subscription, which has a 30-day payment term.
• Recording the transaction: The $500 is recorded as an account receivable in XYZ SaaS’s books.
• Sending payment reminders: On January 25th, XYZ SaaS sends a friendly reminder to ABC Corp that the payment is due in five days.
• Receiving and recording payment: On January 30th, ABC Corp pays the $500. XYZ SaaS records the payment, reducing their accounts receivable balance.
• Following up on overdue payments: If ABC Corp had failed to pay by February 1st, XYZ SaaS would send another reminder and possibly apply late fees.

Following a structured sequence in this workflow fuels the company and keeps it running. When a business makes its payments on time, it reduces the risk of bad debts and improves its cash flow.

Why is the accounts receivable process important?

Managing receivables is an integral part of business management. It contributes to the generation of cash inflow and creates a huge impact on future cashflows. The following are some more reasons why a company should have a solid accounts receivable process cycle:

Maintains Healthy Cashflow

Proper accounts receivable management ensures that payments come in on time, keeping the business financially stable for daily expenses, investments, and expansion. If payments are delayed, cash flow problems may arise, making it harder for the company to cover its financial needs.

Improves Customer Relationships

Managing accounts receivable efficiently ensures that payments are received on time, allowing a business to cover daily expenses, invest in new opportunities, and expand. On the other hand, late payments can cause cash flow problems, making it difficult to meet financial commitments.

Provides Accurate Financial Insights

Keeping precise records of receivables provides important data for financial reporting and analysis. It helps finance managers evaluate the company’s cash flow, track key metrics like Days Sales Outstanding (DSO), and make well-informed decisions.

Late payments are a growing problem in the UK and worldwide. Around 52% of the small and medium-sized businesses have been severely affected in the last year¹.

With 58% of B2B invoices overdue, UK companies face cash flow management problems². Given these stats, it’s safe to state that an accounts receivable process is mandatory for every business, regardless of size.

Accounts receivable process steps

The accounts receivable cycle starts when a customer purchases the product or service from your business on credit. Let’s take a glance at the accounts receivable process steps:

Step 1. Order Placement

Customers will send a purchase order when they decide to invest in your product/service. You’ll create a sales order request when the details of this purchase are finalized. This agreement states:

• The products or services being offered to the customer
• The amount and cost of these products or services
• The scheduled delivery date and location
• The terms and conditions governing the sale

Your credit manager will review the agreement before you send the final sales order to the buyers.

Step 2. Credit Approval

When selling on account, you’re practically extending credit to the buyers and agreeing to receive payments later. Most B2B setups work on this structure. However, running all the background checks is important before issuing the sales order. A few strategies that could help at this stage include:

• Having a credit policy in place: Your business should have a clear credit policy to evaluate customers' credit risk. The level of risk you’re willing to accept will depend on factors like your company’s size, profit margins, and cash flow situation.
• Periodic review of existing customers’ credit scores: Regularly assess the credit terms for current customers, particularly if their order volume grows or their payment patterns shift. This helps protect your business from unnecessary financial risk.

Step 3. Dispatch Invoices

An invoice is the definitive statement of a purchase. It outlines the amount owed and the due date. An invoice should include the following details:

• Business name and contact information
• Customer’s name and contact details
• Invoice number and date
• Description of goods/services provided
• Quantity and price of items
• Total amount due
• Payment terms (due date, late fees, etc.)
• Payment methods accepted

Try to automate the creation and issuing of invoices as much as possible. Several online resources are allowing businesses to make this task a breeze. Quickbooks, Zero, and Wave are the top invoicing tools used by accounts receivable processing teams.

Step 4. Dunning

This is one of the most dreaded AR activities. You need your money ASAP, but you can’t risk losing customers. At this step, you should send reminders at regular intervals so the debt stays on a buyer’s radar. If the buyer misses the payment deadline, continue reaching out regularly, gradually increasing the urgency as more time goes by.

Below are some timeframes businesses use to conduct collections outreach:

• 0-30 Days: Friendly reminders via email or phone.
• 30-60 Days: More formal follow-ups, offering payment plans.
• 60-90 Days: Stronger reminders, including potential fees or legal actions.
• 90+ Days: Final notices before involving collections or legal action.

💡 Read more about the Best Practices on Chasing Payments

Step 5. Cash Application

Once the accounts receivable are collected, payments should be matched with the corresponding invoices. A company can’t use incoming cash until it’s properly assigned to the outstanding invoice. The sooner the money is allocated, the sooner it can be used to pay salaries, fill purchase orders, and invest in more opportunities.

Step 6. Resolve Disputes

Invoice disputes can cause significant payment delays. If a customer raises a concern, it’s important to address it quickly to avoid further delays and preserve customer relationships.

Customers may pay the undisputed portion of the invoice (a partial payment), which adds complexity for your accounts receivable team. They’ll need to verify the reason for the partial payment, check if it’s valid, and figure out how to record it in the accounting system.

Step 7. Write Off the Debts

If the invoice remains unpaid and you’ve given up on collecting it, you must record the amount as bad debt on your balance sheet and income statement. The rules for writing off an unpaid invoice as bad debt can vary depending on your location. A UK business will typically write off debts older than six months unless they actively pursue payment.

Step 8. Reports/Analytics

Once outstanding payments are collected, businesses can review their accounts receivable management process and use different metrics to assess how well it works. Metrics like the receivables to sales ratio, receivables turnover ratio, and days sales outstanding show how much of the receivables compare to sales and how long it takes to turn them into cash. These metrics help businesses understand the risk of unpaid customer debts and how efficiently they collect payments.

International accounts receivable process

The accounts receivable procedures may vary from place to place, and protocols are particularly different when dealing with international clients. The key differences from local receivables are:

• Currency discrepancies: Local receivables involve one currency. But international transactions require dealing with multiple currencies and minimizing exchange rate risks.
• Legal regulations: International receivables must comply with the laws and regulations of multiple countries. On the other hand, local transactions are governed by the laws of a single country.
• Time delays: International collections can take longer due to cross-border transfers and time zone differences, compared to local payments, which are quicker to process.

Business buyers pay invoices in several ways, such as:

• Wire transfers
• ACH or EFT
• Checks
• Credit or debit cards

Navigating the accounts receivable process cycle on an international level is complex. Wise Business is also a good solution to simplify the procedure, enhancing efficiency for businesses of all sizes. UK-based companies that deal with international clients can use Wise Business for international payment collection, enhance financial management, and improve cash flow.

Best practices for accounts receivable processes

Businesses can implement the following practices to conduct efficient accounts receivable processes and procedures:

Maintain Strong Customer Relationships

Communicate professionally and build trust with the buyers to ensure timely payments. If you've validated their authenticity, you can also offer personalized solutions for clients with cashflow difficulties.

Leverage AR Automation Tools

Consider investing in the latest AR automation tools to streamline invoicing, tracking, and reconciliation. You can then integrate these tools with accounting systems for real-time visibility.

Write Clear Credit Policies

Clearly written credit policies remove the chances of misunderstandings. Potential prospects get a clear insight into their payment obligations, fees, interest rates, and credit deadlines.

Implement a Follow-up Process

Be vigilant about pending payments and politely remind clients of overdue payments. You can automate the follow-ups with emails and text messages.

Keep the Data Accurate

Updated data about delayed payments can allow the business to make better decisions about the collection steps.

Common accounts receivable process challenges

An accounts receivable process comes with some challenges, which include:

• Customers delaying payments or failing to pay.
• Errors in invoices cause disputes and payment delays.
• Lack of structured follow-ups and manual tracking.
• Extending credit to high-risk customers without checks.
• Fewer payment methods cause inconvenience for customers.
• Difficulty tracking outstanding invoices and cash flow.
• Tax and financial reporting complexities.

Overcoming these challenges requires constantly updating policies and leveraging sophisticated tools. Our next section discusses ideas for improving the accounts receivable process.

Accounts receivable process improvement ideas

After covering all the basics, you should work on the ways to improvise and get better outcomes. Here are some ideas that could help improve accounts receivable process for your UK business:

Use E-Billing Tools

Use billing software with built-in payment processing, allowing clients to pay directly from their invoices. The system will automatically record payments for you, making tracking easier. You can also set up automated reminders for overdue payments.

Improve Credit Risk Management

Assess client risk using credit-checking services like Dun & Bradstreet or Experian. Based on payment history, you can then set credit limits.

Optimize AR Reports and Analytics

AR dashboards in NetSuite, SAP, or Microsoft Dynamics provide real-time insights. They track aging reports and payment trends to identify late-paying clients.

Offer Early Payment Discounts

This is one of the best motivators for making customers pay. Encourage faster payments with small discounts for early settlements.

Streamline Dispute Resolution

Embed a centralized dispute management system like HighRadius or Gaviti. They can automate dispute tracking and resolution workflows.

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FAQs - Accounts Receivable Process

Here are some commonly asked questions about the accounts receivable process:

What is an accounts receivable workflow cycle?

An accounts receivable workflow cycle outlines the steps required for managing customer invoices. It tracks invoices from inception to completion, ensuring fewer complexities and strong customer relationships.

Why is it important to manage accounts receivable cashflow?

Effective accounts receivable management is essential for maintaining steady cash flow, reducing bad debts, and building strong customer relationships. It plays a key role in a company’s financial stability and liquidity.

Why is automation important to manage accounts receivable?

An automation tool can minimize human effort and errors. It makes prolonged tasks like generating aging reports easy and quick. This frees the finance teams to perform high-level tasks like analysis, setting credit policies, and reviewing the latest tools.

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Sources used:

1. Small businesses in the UK are owed £27K in late payments
2. Three in five UK businesses are owed money from late payments

Sources last checked on date: 13-May-2025