Accounts receivable process: steps to get paid faster

Published Wednesday 6 May 2026

Table of contents

• What is an accounts receivable process?
• Why a strong accounts receivable process matters
• Steps to build your accounts receivable process
• How to measure accounts receivable performance
• Streamline your accounts receivable process with Xero
• FAQs on accounts receivable process

Key takeaways

• A clear accounts receivable process helps you get paid faster and keeps your cash flow healthy. When you follow consistent steps from credit approval to payment collection, you reduce the risk of bad debt and late payments.
• Setting payment terms upfront and sending invoices promptly are two of the most effective ways to shorten your collection cycle. The sooner your customer receives an accurate invoice, the sooner you get paid.
• Tracking key metrics like days sales outstanding and your accounts receivable turnover ratio gives you a real-time view of how well your collections are performing. These numbers help you spot problems before they grow.
• Automating routine tasks like invoice reminders and payment matching frees up your time so you can focus on running your business instead of chasing payments.

What is an accounts receivable process?

Your accounts receivable process is the complete set of steps you follow to collect money your customers owe you. It covers everything from approving a customer's credit through to receiving and recording their payment.

Accounts receivable represents the outstanding invoices your business has sent but hasn't been paid for yet. These are sometimes called trade debtors on your balance sheet.

In Canada, the Accounting Standards for Private Enterprises (ASPE) Section 3856 provides guidance on how to recognize and measure financial instruments, including receivables. Following these standards helps you report your receivables accurately.

It's worth noting the difference between accounts receivable and accounts payable. Accounts receivable tracks what customers owe you, while accounts payable tracks what you owe your suppliers. Both play a critical role in managing your cash flow.

Why a strong accounts receivable process matters

A well-organized accounts receivable process directly protects your cash flow and keeps your business running smoothly. Without one, you're likely to run into problems that cost you time and money.

Cash flow gaps are one of the biggest risks. When customers pay late or not at all, you may struggle to cover payroll, rent, and supplier invoices. This can force you to rely on credit or lines of financing to bridge the shortfall.

You also waste valuable time when you don't have a system in place. Chasing overdue invoices manually, sorting through emails, and reconciling payments one by one eats into hours you could spend growing your business.

Bad debt is another real concern. The longer an invoice goes unpaid, the less likely you are to collect it. A structured process helps you catch overdue accounts early before they become uncollectible.

Late payments can also strain your customer relationships. Awkward follow-up conversations and unclear terms create tension that's easy to avoid with a consistent process.

On the positive side, a strong accounts receivable process helps you forecast revenue more accurately. You'll have better visibility into when payments are expected, which makes it easier to plan ahead and invest with confidence.

Steps to build your accounts receivable process

Building your accounts receivable process doesn't have to be complicated. Follow these nine steps to create a system that helps you get paid on time and reduces your risk.

1. Establish customer onboarding and credit approval

Before you extend credit to a new customer, take time to assess their ability to pay. Run a credit check, ask for trade references, and review their payment history with other suppliers.

Set clear credit limits based on what you find. A good starting point is to keep any single customer's outstanding balance below 5% of your total assets, in line with OSFI commercial lending guidelines.

Document your approval criteria so every customer goes through the same process. This protects you from extending too much credit and helps your team make consistent decisions.

2. Set clear payment terms upfront

Your payment terms tell your customer exactly when and how to pay. Define these before you start any work or deliver any goods.

Common formats include Net 30 (payment due within 30 days of the invoice date) and Net 60 (due within 60 days). Some businesses offer early payment discounts, for example, 2/10 Net 30 means a 2% discount if paid within 10 days.

Spell out your accepted payment methods, late fee policy, and any interest charges on overdue amounts. Include these terms on every invoice and in your customer agreements.

In Canada, CPA Canada's guidance on ASPE Section 3856 outlines how to account for financial instruments, including trade receivables. Aligning your terms with these standards keeps your books accurate.

3. Secure payment agreements when necessary

For larger orders or higher-risk customers, consider asking for a personal guarantee or a signed payment agreement. This gives you an added layer of protection if a customer defaults.

A personal guarantee means the business owner takes personal responsibility for the debt. This can be particularly useful when you're extending credit to a newer or smaller company.

4. Send invoices promptly and accurately

Send your invoice on the same day you deliver goods or complete the service. The faster your customer receives the invoice, the sooner your payment clock starts ticking.

Make sure every invoice includes the correct amount, a clear description of what was provided, the invoice date, payment due date, and your accepted payment methods. Errors or missing details give customers a reason to delay payment. Check out this guide to invoicing for more details on what to include.

5. Offer convenient payment options

The easier you make it for customers to pay, the faster you'll collect. Offer multiple payment methods so customers can choose the one that works best for them.

Consider accepting credit and debit cards, direct debit, digital wallets, and online payment portals. You can also use Tap to Pay to accept contactless payments in person.

Providing a self-service portal where customers can view their invoices and pay online reduces friction and speeds up collection.

6. Track invoices and monitor payments

Keep a close eye on every invoice from the moment you send it. Track the status of each one: sent, viewed, due, overdue, or paid.

Use aging categories to group your outstanding invoices by how long they've been unpaid: current, 1 to 30 days, 31 to 60 days, 61 to 90 days, and 90+ days. This helps you prioritize follow-ups on the oldest and largest balances first.

Review payment history for each customer regularly. Patterns of late payment may signal that you need to adjust their credit terms. Reconcile payments against invoices frequently to keep your records accurate.

7. Manage collections systematically

Create a clear escalation timeline so you know exactly what action to take and when. Consistency is key to collecting on time.

Here's a practical timeline to follow:

• On the due date: send a friendly payment reminder
• Seven days overdue: send a follow-up email or message
• 14 days overdue: make a phone call to discuss the outstanding balance
• 30 days overdue: send a formal written notice
• 60 days overdue: escalate to a senior contact or consider a payment plan
• 90+ days overdue: consider engaging a collections agency or taking legal action

When making phone calls, be professional and direct. State the amount owed, the invoice number, and the original due date. Listen to your customer's situation and try to agree on a payment plan if needed.

Review payment patterns regularly. If a customer is consistently late, it may be time to tighten their credit terms or require payment upfront. For more tips on following up, read about chasing outstanding invoices.

8. Handle invoice disputes professionally

When a customer disputes an invoice, respond quickly. Acknowledge their concern and let them know you're looking into it.

Investigate the issue by checking your records, delivery confirmations, and any correspondence. If the error is on your side, correct the invoice and reissue it promptly.

If the invoice is correct, provide clear documentation to support the charge. Resolve the dispute as quickly as possible to avoid delays in payment. Document every step of the resolution for your records.

9. Know when to write off uncollectible debt

Sometimes, despite your best efforts, a customer simply won't pay. Knowing when to write off a bad debt is an important part of managing your receivables.

Consider writing off a debt when you've exhausted all collection efforts, the customer has gone out of business, or the cost of pursuing the debt exceeds the amount owed.

In Canada, bad debt write-offs can have tax implications that vary by province. Keep thorough documentation of your collection attempts, correspondence, and the reason for the write-off. This supports your claim if the Canada Revenue Agency (CRA) reviews your deduction. For more guidance, learn how to manage debt effectively.

How to measure accounts receivable performance

Tracking the right metrics tells you whether your collection efforts are working and where you need to improve. Regular measurement helps you catch problems early and make smarter decisions about credit and collections.

The accounts receivable turnover ratio shows how efficiently you're collecting payments over a period. Calculate it by dividing your net credit sales by your average accounts receivable. A higher ratio means you're collecting faster, which is generally a sign of a healthy process.

Days sales outstanding (DSO) measures the average number of days it takes to collect payment after a sale. The formula is: (Average Accounts Receivable / Net Revenue) x 365. A lower DSO means your customers are paying more quickly.

Your aging report breaks down outstanding invoices into categories: current, 30 days, 60 days, and 90+ days overdue. If a growing share of your receivables falls into the older categories, it's a signal to review your collection process and follow up more aggressively.

The collection effectiveness index (CEI) measures how successful you are at collecting receivables within a given period. It compares what you actually collected to what was available to collect. A CEI close to 100% means your collections process is performing well.

Streamline your accounts receivable process with Xero

The right tools can take the manual work out of your accounts receivable process and help you get paid faster. Xero's accounting software gives you everything you need to stay on top of your receivables.

With Xero, you can:

• send invoices instantly from your computer or phone
• track payment status in real time so you always know what's outstanding
• automate payment reminders to save you from manual follow-ups
• accept payments easily through multiple methods, including online and in person
• monitor your cash flow with clear dashboards and reports

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FAQs on accounts receivable process

Here are answers to frequently asked questions about accounts receivable process.

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

The five C's are Character, Capacity, Capital, Collateral, and Conditions. Character refers to a customer's reputation and credit history. Capacity looks at their ability to repay based on income and existing obligations. Capital considers their overall financial strength, while Collateral covers any assets they can pledge as security. Conditions examine external factors like the economy or industry trends. These criteria align with OSFI's capital guidelines for assessing credit risk.

What is the 10% rule for accounts receivable?

The 10% rule is a risk signal: if 10% or more of a customer's balance is severely past due (typically 90+ days), treat their entire account as higher risk. This may mean tightening their credit terms, reducing their credit limit, or requiring payment upfront for new orders.

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

Send a friendly reminder on the due date itself, then follow up within seven days if the payment hasn't arrived. Waiting too long reduces your chances of collecting. A structured follow-up schedule with escalating actions at 14, 30, 60, and 90+ days helps you stay consistent.

Can I charge interest or late fees on overdue invoices in Canada?

Yes, you can charge interest or late fees on overdue invoices in Canada, provided you've included these terms in your customer agreement upfront. The Interest Act (Canada) requires that the annual rate of interest be clearly stated. Make sure your terms are transparent and agreed upon before you provide goods or services.

What is accounts receivable automation?

Accounts receivable automation uses software to handle routine tasks like sending invoices, issuing payment reminders, matching payments to invoices, and generating aging reports. It reduces manual data entry and helps you collect payments faster. Automation also gives you real-time visibility into your outstanding receivables, so you can focus on growing your business instead of chasing payments.