How to build a watertight accounts receivable process

Published Friday 12 September 2025

Table of contents

• What is accounts receivable management?
• Why does your business need an accounts receivable process?
• The number one rule of accounts receivable management
• Streamline your accounts receivable process with Xero
• FAQs about accounts receivable processes

Key takeaways

• Implement customer screening procedures including credit checks and reference calls before extending credit to prevent payment problems and protect your cash flow from the start.
• Establish clear written payment terms that specify billing schedules, payment deadlines, and consequences for late payment, then obtain signed agreements before beginning any work.
• Send invoices immediately after completing work and offer multiple convenient payment options such as card payments, digital wallets, and direct debit to accelerate your payment cycle.
• Follow a consistent escalation process for overdue payments, starting with email reminders after 7 days, phone calls after 14 days, formal demands after 30 days, and debt collection after 60 days to maintain predictable cash flow.

What is accounts receivable management?

Accounts receivable management involves getting money owed to your business. This process includes:

• Customer vetting: Choose clients who pay on time
• Clear billing: Send accurate invoices promptly
• Payment terms: Set enforceable consequences for late payment
• Follow-up systems: Track and chase overdue accounts consistently.

Why does your business need an accounts receivable process?

A solid accounts receivable process tracks what you're owed, improves your cash flow, saves you time, and helps you build better relationships with your customers. A clear system means you spend less time chasing payments and more time on your business. It helps you spot potential payment issues early, reduce the risk of bad debt, and ensure money comes in predictably, giving you the confidence to plan for the future.

1. Choose your customers carefully

Customer screening prevents payment problems before they start. Research potential clients to avoid cash flow headaches:

• Credit checks: Use your accounting software to verify their payment history, but note that providing formal credit assessments is an activity restricted to holders of an Australian Credit Licence
• Reference calls: Contact their other suppliers (with customer consent) to confirm payment reliability.

2. Put payment terms in writing before you start

Written payment terms eliminate confusion and protect your business. Include the following:

• Billing schedule: When invoices will be sent
• Payment deadline: How long customers have to pay
• Late payment consequences: Interest, fees, or legal action
• Signed agreement: Get written approval before starting work.

Common accounts receivable payment terms

Setting clear payment terms helps your customers know exactly when to pay. Here are a few common options you can use:

• Net 30: This is one of the most common terms. It means the full payment is due 30 days after the invoice date. You can also use Net 15, Net 60, or any other number of days that suits your business.
• Due on receipt: This means payment is due as soon as the customer receives the invoice. It's often used for one-off projects or new customers.
• 2/10 Net 30: This offers a small discount to encourage early payment. It means the customer can take a 2% discount if they pay within 10 days, otherwise the full amount is due in 30 days.

Set payment terms that suit your cash flow and industry.

3. Get a personal guarantee

Personal guarantees let you pursue both the business and its owner for unpaid debts. This doubles your collection options if payments go wrong.

Some business owners may not want to sign personal guarantees, so consider how this might affect your relationship.

4. Send your invoice quickly

Quick invoicing speeds up your payment cycle. Send bills immediately after completing work to start the approval process sooner.

eInvoicing makes this even faster. Your invoices go directly into your customer's accounting software for instant processing – no matter what software they use.

5. Make it easy for customers to pay you

Multiple payment options get you paid faster. Offer customers convenient ways to pay:

• Card payments: Credit and debit cards
• Digital wallets: PayPal, Apple Pay, Google Pay
• Direct debit: Automatic bank transfers
• Contactless payments: Tap-to-pay solutions

The easier you make it to pay, the sooner you receive your money.

6. Monitor payments closely

Payment tracking keeps you on top of what's owed. Monitor every invoice until it's fully paid:

• Maintain an invoice list: Track all outstanding payments
• Check bank accounts regularly: Confirm when payments arrive
• Update payment status: Mark invoices as paid immediately

Without accurate tracking, you can't manage your cash flow effectively

7. Have a plan for overdue payments in your accounts receivable process

Overdue payment procedures ensure consistent follow-up. Plan your escalation steps in advance:

• First reminder: Email after 7 days overdue
• Phone follow-up: Call after 14 days overdue
• Final notice: Send a formal demand after 30 days. According to Australian Accounting Standards, there is a rebuttable presumption that credit risk has increased significantly since initial recognition once payments are over 30 days past due.
• Debt collection: Engage collectors after 60 days, ensuring they adhere to the official Debt collection guideline published by ASIC and the ACCC.

Document your policy and follow it consistently – Follow your policy consistently.

8. Make the big calls

Phone calls resolve payment issues faster than emails. Direct conversation cuts through delays and misunderstandings.

During collection calls:

• Confirm satisfaction: Ensure they're happy with your work
• State the situation: Point out the overdue amount
• Get commitment: Ask for a specific payment date

9. Make the even bigger calls

Customer payment analysis helps you spot problem accounts. Review payment histories regularly to identify chronic late payers.

For consistently late customers:

• Discuss alternatives: Offer different payment methods
• Adjust terms: Reduce credit limits or require upfront payments
• Consider termination: Some customers aren't worth keeping

Good customer selection is essential to accounts receivable success.

The number one rule of accounts receivable management

Have a plan for your debtors. Treat all invoices consistently by following the same steps for everyone who owes you money. A consistent accounts receivable process will help keep you in business so make sure you have one that:

• makes new customers aware of their obligations to you
• gets invoices out the door as soon as a job is complete, or billing cycle comes around
• sets out the specific actions you'll take if an invoice is overdue

If you need more tips on getting paid, check out our guide to invoicing.

Streamline your accounts receivable process with Xero

Building a watertight accounts receivable process is key to maintaining healthy cash flow. By automating tasks like sending invoices and payment reminders, you can get paid faster and reduce manual admin. Xero gives you a real-time view of your outstanding invoices, so you always know who owes you money and when it's due. You can focus on running your business, confident that your finances are under control. See how much simpler it can be. Try Xero for free.

FAQs on accounts receivable processes

What are the steps in the accounts receivable process?

A typical accounts receivable process includes: setting clear payment terms, sending invoices promptly, tracking payments, sending reminders for overdue invoices, and following a collections plan for unpaid debts.

What are the 5 C's of accounts receivable management?

The 5 C's help you assess a customer's creditworthiness before you do business with them. They are Character (reputation), Capacity (ability to pay), Capital (financial resources), Conditions (economic or industry factors), and Collateral (assets to secure payment).

How long should I wait before following up on an overdue invoice?

It's good practice to send a friendly reminder a day or two after the due date. If you don't hear back, follow up with a phone call a week later. A consistent follow-up plan is key.

Should I offer payment plans to help customers pay?

Offer a payment plan to help a good customer who is having temporary trouble paying. This shows flexibility and can help you recover money you might otherwise lose. Get the new terms in writing.

What's the difference between accounts receivable and revenue?

Revenue is the total income you earn from selling goods or services. Accounts receivable is the portion of that revenue that you've earned but haven't yet received in cash from your customers.