The Ultimate Guide to Accounts Receivable

Welcome to our comprehensive Accounts Receivable (AR) guide, where you will learn everything you need to know about managing AR for your business and how the right accounts receivable software can make all the difference. Our team of AR experts crafted this ultimate guide to cover the ins and outs of accounts receivable, including:

• The end-to-end AR process 
• Best practices for efficient AR management using a modern accounts receivable management system
• Common AR challenges (and how to overcome them)

In addition to these core topics, we also include an FAQ section that answers some of the most common questions about AR management. Our goal is to provide you with a thorough understanding of every aspect of AR, so you can approach your receivables management software decisions with confidence and clarity.

Thank you for choosing Centime as your guide to mastering AR management. Let's get started!

Why this matters now: In 2024, half of U.S. B2B invoices were overdue, and bad debts averaged ~8% of B2B credit sales—pressuring cash flow and DSO.

What are Accounts Receivable?

Accounts receivable are funds that a customer owes to a business after receiving goods or services for which they have not yet paid. Accounts receivable may also refer to goods or services that a customer has purchased on credit. In short, accounts receivable refers to any outstanding balances a business intends to collect from a customer  and it's one of the core areas that accounts receivable software and AR process automation are designed to manage.

Today, most B2B AR collections ride the ACH rail; in 2024 the ACH Network handled 33.6B payments, and Same Day ACH topped 1.2B payments (+45% YoY), making same-day credits a practical option for accelerating late-stage collections.

Businesses typically aim to collect accounts receivable within a year, but often much sooner. You can think of accounts receivable as a short-term line of credit, where the company expects quick payment for the full amount of the product or service they provided to their customer. 

Accounts Receivable on the Balance Sheet

When it comes to accounting, finance teams record their accounts receivables on their balance sheet as current assets. This is because teams intend to collect their receivables from the customer as a debt within a year. Firms can also use their accounts receivable as collateral to secure a loan. 

Who Uses Accounts Receivable?

Businesses will use accounts receivable any time they offer a product or service for a customer on credit. Firms may use AR to allow customers to utilize a product or service upfront and pay later as a sales tactic for high-ticket items. 

The size of a company often determines who handles its accounts receivable process. Freelancers or sole proprietors may handle AR when first starting out, while larger companies are more likely to have a dedicated AR department or an AR automation platform to manage the workload.

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

Accounts receivable and accounts payable are incredibly different. In fact, they are opposites. As we mentioned, receivables refer to outstanding balances due to a company for providing goods or services on credit. 

In contrast, accounts payable refer to money that one party owes another for goods or services received. In the case of a company, accounts payable may include outstanding bills for supplies, rent, utilities, etc. Payroll is not included in accounts payable. Payroll is accounted for separately (e.g., operating expenses), while AP typically covers vendor obligations such as materials, services, and rent.

Accounts Receivable Example 

To further illustrate the concept of accounts receivable, consider a gourmet popcorn shop. They've come to an agreement with a local movie theater to deliver $2,500 worth of popcorn per week. At the end of each month, the popcorn shop sends an invoice to the theater for $10,000 to cover all the popcorn delivered during the month. 

This is where the concept of accounts receivable comes into play. The moment the popcorn shop drops off the popcorn, but before the theater pays for said popcorn, the $10,000 owed to the popcorn shop is considered the popcorn shop's accounts receivable. The money is due to the popcorn shop because they fulfilled their part of the deal but haven't yet been paid for their goods. 

In cases like these, the theater may be expected to pay the $10,000 within 30 days, which is considered to be a short-term credit arrangement. The popcorn shop trusts the theater enough to deliver the popcorn in good faith, trusting they will pay for it in the alloted time. 

Example of Accounts Payable

To illustrate accounts payable, let's continue with the popcorn/theater example. To make their popcorn, the shop must purchase various items like popcorn kernels, flavoring, and packaging. They source their popcorn ingredients and packaging from a one-stop-shop supplier: Supplier X. 

Every month, the popcorn shop places an order with Supplier X for $15,000, and Supplier X delivers the ingredients. Like the theater in the previous example, the popcorn shop receives the supplies without having paid the $15,000 for them yet. Until they pay for those materials, that $15,000 owed is considered the popcorn shop’s accounts payable. 

Note: Not every accounts receivable or accounts payable situation will coincide with this example, but this situation is very common in businesses today. 

The Similarities Between Accounts Receivable and Accounts Payable

Though there are fundamental differences between accounts receivable and accounts payable, the two areas do have some similarities. These commonalities include:  

• Both affect your cash flow: Accounts receivables signify cash coming in, and accounts payable signify cash going out. 
• Both have to do with credit transactions: Accounts receivables originate from sales on credit, and accounts payable originate from purchases on credit. 
• Both carry the element of risk: Accounts receivable is risky given that you may not be able to collect the money from the customer within a specified period. Accounts payable is risky because you may not have the money you owe when the payment due date arrives. ‍
• Both involve invoicing: Whether we're talking about accounts receivable or accounts payable, invoices are exchanged between parties.

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What Does The Accounts Receivable Process Look Like?

Accounts receivable is not a single, one-touch process. It's a multi-step workflow  and one that a well-implemented accounts receivable management system can significantly streamline. Most AR cycles involve five common steps: 

1. Onboard your customer: In this first stage, you'll gather and record pertinent customer information. This may include your customer’s billing address and some measure of their creditworthiness. In addition to that, you'll draft a payment plan and share it with your customer. Communicate the payment plan's terms so there won't be any surprises for the customer in the future. 

2. Send out your invoice: Next, you will send your customer an invoice soon after delivering the product or performing the service. An invoice is a document that includes information about the products or services you provided to the customer, along with payment terms that dictate how and when the customer must provide payment. An invoice generally includes the following information: 

1. Name and address of the customer. 
2. The business name and address. 
3. A unique invoice number for the organization. 
4. The date of the invoice. 
5. The payment due date. 
6. A concise description of the products or services sold.
7. How much everything costs. 
8. The delivery date of the products or services. 
9. The total amount due. 

Most accounts receivable software platforms let you schedule multiple automated reminders before and after the due date. For example, QuickBooks allows configurable reminder cadences you can set per customer or per invoice.

3. Tracking and collecting receivables due: This is where your AR automation platform earns its keep. A proven, machine-driven cadence is T-3, T, +7, +14, +30 days (relative to due date), which tools like QuickBooks support via scheduled reminders and templates. If the customer doesn't pay by their due date, follow up  a process known as dunning. This can include a dunning letter, a past-due notice, or a direct call.

4. Deductions and exceptions: Sometimes there will be cases where you will need to make deductions from certain accounts to account for returns or pricing issues. In addition, you may need to update your accounts receivable in the case of pricing disputes or product/service quality issues. Say you've provided a product to a customer and then found that a portion of it was unusable - you may offer a price reduction to ensure the customer doesn't feel slighted. Communicate any deductions or exceptions to the client right away. 

5. Cash reconciliation: After receiving payment, post it in your accounting system by locating the invoice and applying the payment to show the correct balance. Cash posting is most often handled by a dedicated finance team member, and AR process automation tools can significantly reduce the manual burden here. 

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What are Best Practices for Accounts Payable?

Here are 6 best practices to optimize your AR process with the support of the right receivables management software:

1. Use accounts receivable management software.

AR management requires moving numbers around and completing complex transactions. Manual handling invites human error  that's why accounts receivable software is so important. It reduces errors, keeps your books cleaner, and makes your team more efficient. Modern AR automation platforms even allow you to customize rules to your specific AR workflow, from invoice to cash posting, enabling a data-driven collections strategy. Prioritize systems that support automated reminder cadences and Same Day ACH to shorten DSO. Same Day ACH volumes grew 45% YoY in 2024, crossing 1.2B payments  indicating broad readiness across banks and ERPs. 

2. Prevent disputes with clearer invoices.

Late payments in the U.S. are often driven by administrative issues and invoice disputes. Tighten SKU/PO references, delivery confirmations, and tax details to reduce exceptions and speed up collections.

3. Evaluate your results on an ongoing basis.

There's no way to know whether you're managing accounts receivable effectively unless you track the right metrics  including DSO, CEI, and more (covered later in this guide). With ongoing evaluation, you'll have the data needed to formulate a winning collections strategy.

4. Have descriptive and targeted policies in place.

When a customer purchases something on credit, both parties should have a clear understanding of the relevant credit and collection policies. Write out and update the policies as necessary, ensuring customers are aware at every turn. This reduces confusion and fosters a positive customer experience.

5. Send out invoices promptly. 

When it comes to AR management, time is of the essence. How quickly you send an invoice is one of the most influential determinants of whether you'll get paid. Sending the invoice immediately after delivering your product or service is always ideal   customers are less likely to dispute the payment or forget about the transaction.

6. Keep detailed records. 

 Records are critical to effective accounts receivable management. They're necessary for tracking outstanding balances, required during audits and for tax purposes, and essential during the dispute resolution process. Ensure your records are always detailed, accurate, and up to date.

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What are the Benefits of Optimizing your Accounts Receivable Processes?

Managing accounts receivable takes a concerted effort, but the benefits of a well-run accounts receivable management system are well worth it:

• Reduced bad debt. Bad debt refers to money that a business writes off after deeming it uncollectible. If you're taking stock of accounts receivable and working towards recovering those funds, you're more likely to pinpoint customers who aren't good about paying their debts. You can then make efforts to reduce bad debt. A couple of ways you can do that include refusing business to repeat offenders or shortening payment terms.
• Increased cash flow. Prompt collection of accounts receivable directly improves cash flow, giving your business liquidity to reinvest, handle emergencies, or pay down debt.
• Lower costs. The quicker you recover accounts receivable, the fewer resources you spend on wasted time, effort, and bad debt. The right receivables management software accelerates this process.
• Stronger customer relationships. Managing accounts receivable professionally signals to customers that you are a trustworthy, reliable business, making them more comfortable and eager to do business with you again.

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Which are the Most Important AR KPIs to Track?

Unlock the full potential of your AR management by implementing Key Performance Indicators (KPIs) to monitor and streamline AR-related tasks and issues. The following 3 core KPIs empower you to track the efficiency of your AR process, identify areas for improvement, and optimize your financial operations.nlock the full potential of your accounts receivable management system by implementing Key Performance Indicators (KPIs) to monitor and streamline AR-related tasks. These 3 core KPIs help you track efficiency, identify areas for improvement, and optimize your financial operations:

1. Aging of Receivables/AR Turnover Ratio

This metric lets you know how often you collect your average AR balance in a given period. A low AR turnover ratio indicates that you need to boost your collections efforts or revisit your credit policies and make them stricter. To calculate the AR turnover ratio, divide net credit sales by average accounts receivable. Shoot for a high AR Turnover ratio. 

AR Turnover Ratio = Net Credit Sales/Average Accounts Receivable.

2. Days Sales Outstanding (DSO)

DSO tells you how long it takes for customers to pay you post-invoicing. To calculate this metric, divide your total accounts receivable by your total credit sales and multiply that by 365. The goal with this metric is to get your DSO to be as low as possible. 45 or lower is desirable on a generalized basis. 

DSO= [Total accounts receivable/Total credit sales] x 365. 

3. Collection Effectiveness Index (CEI)

CEI measures how effective your collection efforts are. The formula for this collection performance metric is more complicated. The number you're shooting for is 80% or higher. If you're not yet at that level, there's room for improvement. 

CEI = [Beginning Receivables + Monthly Credit Sales - Total Ending Receivables] / [Beginning Receivables + Monthly Credit Sales - Current Ending Receivables] x 100 

Understanding and leveraging these KPIs can help you make informed, data-driven decisions that ultimately accelerate accounting success. Looking for more AR metrics to measure your success? Our user-friendly AR learning center provides a comprehensive list of AR KPIs, enabling you to take proactive steps towards a more efficient and profitable accounts receivable process. 

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What are the Most Popular AR Mistakes?

We've covered best practices; now let's look at the mistakes that can undermine even the best AR process automation strategy. Avoiding these five errors can lead to healthier cash flow and long-term success:

1. Trusting untrained professionals to manage AR. AR management can be complex. Entrust it to experienced professionals  or a reliable accounts receivable management system to ensure accuracy and efficiency.
2. Not offering incentives for early balance payments. Encourage customers to settle their balances promptly by providing payment incentives. This helps accelerate cash flow and reduces the risk of delayed payments.
3. Forgetting to track AR data. Regular analysis of AR performance helps identify areas for improvement and prevents missed opportunities. Your receivables management software should surface this data automatically.
4. Ignoring unpaid balances. Don't rely on a single invoice to ensure payment. Instead, send timely reminders to customers about their outstanding balances. Proactive follow-ups help prevent overdue accounts from turning into bad debt.
5. Devaluing customer connections. Ignoring or disrespecting customers can lead to delayed payments and damage your reputation. Instead, foster positive relationships with your clients, as they are more likely to pay on time when they feel connected to your business. 

By addressing these common AR mistakes, you can streamline your processes, improve cash flow, and set your business on the path to long-term success. Learn more by reading this article on AR Challenges and how to fix them. 

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What Happens When Teams Mismanage Accounts Receivable?

In today's fast-paced business world, managing AR effectively  ideally with a modern AR automation platform is crucial. Failure to do so can wreak havoc on your cash flow, leading to a domino effect of negative consequences:

• Less liquidity. When you neglect AR management, your business risks losing liquidity, which can cripple your ability to meet financial obligations and invest in growth opportunities. 
• Bad debts. This lack of cash flow can snowball into a mounting pile of bad debts, leaving you scrambling to recover funds that may never materialize.‍
• Poor customer relationships. Moreover, poorly managed accounts receivable can strain customer relationships, as inconsistent communication and unclear payment expectations may create confusion and frustration. This, in turn, can lead to a tarnished reputation and a potential loss of valuable clients.‍
• Inefficiency. Disorganized financial records hinder your team's productivity, wasting precious time and resources  the very problems a strong accounts receivable management system is designed to eliminate.

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What is the Future of Accounts Receivable?

Embracing AR process automation is crucial in today's fast-paced business environment. Time-consuming manual processes have long plagued AR teams  but with the power of an AR automation platform, teams at small startups and enterprises alike can enhance operational efficiency, reduce human error, and accelerate cash flow.

With the power of automation at their fingertips, AR teams at small startups and enterprises alike can enhance their operational efficiency, reduce human error, and accelerate cash flow.

What is AR Automation?

AR automation is a process that streamlines and automates some or all manual tasks associated with the accounts receivable workflow. A modern AR automation platform optimizes the end-to-end AR process, making it faster and more accurate.

AR automation tools can help teams with the following accounts receivable functions: 

• Creating invoices and sharing them with customers
• Processing payments 
• Drafting and sending payment reminders 
• Reconciling accounts 
• Tracking and analyzing AR data 

The Benefits of Automating Accounts Receivable with AR Process Automation

Deploying receivables management software to automate your AR process provides a myriad of benefits:

1. Fewer human errors associated with manual data entry. 
2. Less time and effort required to manage receivables, since the software application will do most of the work for you. 
3. More cash on hand due to timely collection of customer payments. 
4. More time to focus on things other than AR. 
5. Stronger customer relationships.

 Is Accounts Receivable Automation Software Right for You?

From startups to established enterprises, accounts receivable software offers transformative benefits  regardless of size or industry. Here are some tell-tale signs it's time to automate:

• Your business is growing rapidly and managing accounts receivable processes has become overwhelming.
• Your AR team only consists of a handful of people, or perhaps it's just you, and you're looking to boost productivity without adding additional headcount.
• Errors in invoicing, payment processing, or other areas of accounts receivable are causing friction with your customers.
• Your team wants to leverage automated reports to enhance your accounts receivable management system. 

Managing AR with Centime

If you're searching for a powerful AR automation platform, consider Centime. It's a premier suite of finance automation applications built to help you achieve your cash flow goals. The Centime AR Automation application is designed to make sophisticated predictions regarding cash inflows, streamline the collections process, accept payments, and track your AR performance  making it a comprehensive accounts receivable management system for modern finance teams.

Here's how Centime's accounts receivable software transforms your AR process:

• Automate payment reminders
• Accept online ACH and credit card payments
• Automate cash posting 
• Track key KPIs, like DSO and CEI 
• Document customer interactions 
• Predict late payments 
• And more! 

Centime easily integrates into Oracle NetSuite, QuickBooks Online, and Sage Intacct. You can use the AR application alone or maximize cash flow by utilizing the whole suite of applications: Cash Flow Forecasting, AP (Accounts Payable) Automation, KPI Tracking and Monitoring, or Centime Credit Line and Credit Card.

If you want to maintain healthy cash flow and let your business flourish, traditional AR processes alone won't cut it. That's why AR process automation tools and a reliable receivables management software solution are increasingly essential for finance teams looking to eliminate time-consuming manual tasks and stay ahead of collections. We encourage you to continue educating yourself about AR and leverage Centime's AR automation platform to take control of your receivables today.