Accounts Receivable Management

What is an Account Receivable?

Accounts receivable in the books of account means the business has made a sale or delivered a service but the payment for the same is yet to be realized. This also means that it is a sale on credit basis where the contractual terms offer credit period to the customer depending upon what has been agreed to between the parties. The credit terms can vary between 0-90 days generally but can be for a higher duration based on the contracted terms. However, businesses normally have credit terms based on the type of industry to which they belong, market practice in the industry, pricing negotiated between the parties and many other factors can influence the credit terms.

Accounts receivable process begins with generation of client invoice. Thus, recording of client invoice with accurate information in terms of the product/service, pricing, taxation, due dates of payment, contractual terms with the customer, comparison with purchase order etc is a very crucial part for an effective control over the receivables. The billing software needs to have all in built controls and different levels of authorisation to ensure accurate generation of Invoice.

Steps in Accounts Receivable Process

An enterprise focuses on Sales growth as it is the driving factor towards all future needs of the business but Sales growth without proper credit control can lead to failures in the business. Thus, for an organisation to have an effective control needs to establish proper accounts receivable processes to ensure smooth flow of funds for running the business.

Step 1 (Establishment of Credit Practice)

The first step in this direction is Establishing Credit Practices. Credit practice means that for any business they need to know their potential customer very well before starting to deal with them. The identification process may involve getting the reference checks of the potential customer, credit reports, getting the customer financials from the public documents, past payment track record, interactions with the client etc. All the above processes will eventually help in identifying the credit worthiness of the customer and thus helping in determining whether credit terms to be offered or not and if yes then the period of credit to be offered and other checks and balances. The credit terms may vary from customer to customer.

Step 2 (Customer Account & Master Creation)

Once a business enterprise moves ahead with establishing relationship with the potential customer the next step shall be setting up the customer account and creation of customer master with all statutory details duly incorporated. This will ensure compliance and proper invoicing.

Step 3 (Invoicing)

Once the Customer master is set up the enterprise based on the purchase order and other negotiated terms can issue invoice in the name of the customer. The main points to be ensured while invoicing is as under:

  • The name and address of the Customer must be accurate.
  • The Invoice should contain a unique Invoice number.
  • The Invoice should incorporate the customer’s tax registration number accurately to help them get credit of taxes and many other clearances.
  • The Invoice should have proper description of the products or services rendered with proper tax codes (if any)
  • The Taxes charged should be accurate and in line with the prevailing laws.
  • The invoice should clearly mention the due date of payment.
  • The Invoice should be accompanied by all the documents which would enable the customer to get clearances of the goods and properly maintain their accounting records.
  • The Invoice should either be sent in Physical copy or if they are digitally signed it should clearly mention that the invoice is digitally signed and does not require signature.
  • A maker checker mechanism in Invoice processing will help minimise errors and efforts involved in correction of wrongly generated invoices.

Step 4

Many enterprises and businesses use different software for invoicing and accounting thus it becomes very crucial that the invoicing software is properly integrated with the accounting software to ensure minimal human intervention so that the effort is minimised.

Step 5 (Due Date Reports to Collection Team)

The Credit/collection team needs to get due date reports well in advance from the accounting department to help them follow up with the clients and send reminders to make payment on due dates. The follow up process must be robust and automated to ensure customer is aware of the due dates and, he is not harassed by frequents calls.

Step 6 (Payment Collection)

The Credit/collection team should ensure timely deposit of payments from customer to the company bank account and ensure to provide the payment details to the accounts department for reconciliation.

Step 7 (Reconciliation)

Based on payment details received from the collection team the accounts department needs to ensure that payments realised from customers are knocked off against each invoice and as per instruction of the customer. In case of lump sum payments, the ideal way (in the absence of any customer instructions) is to set off payment on First in First out basis.

Step 8 (Reporting)

In the entire process the management needs to be reported on the collections received, overdues, deductions (if any made by customer), disputes raised by the customer, invoicing errors etc. All these reporting will help the management to take appropriate measures which may range from discussions with the client about the payment deductions, overdues, service issues etc and finally arrive at an appropriate decision in the best interest of the business.


An efficient Accounts receivable process helps management in monitoring as well as collection of payments on time which will eventually help in the reduction of working capital cycle and in turn reducing the cost of funds. In addition, the Management may also get insights on their own business issues like invoicing errors, delayed collections due to service issues and many other aspects.

Thus, a constructive review mechanism will enable companies/firms to gain insights on their business process flow. Many businesses also initiate internal audit checks at every stage of customer onboarding which is also a highly effective way of managing the entire process.


Let's Chat!

× How can I help you?