Accounts receivable process: your step-by-step guide

Published Wednesday 15 April 2026

Table of contents

• What is an accounts receivable process?
• Why a solid accounts receivable process matters
• The accounts receivable process: Step by step
• FAQs on accounts receivable process

Key takeaways

• Vet customers before extending credit by running credit checks and reviewing their payment history, so you avoid spending months chasing invoices that may never be paid.
• Set clear payment terms in writing before you start work, including the payment deadline, late payment interest charges, and accepted payment methods, to remove ambiguity and give yourself a solid basis for chasing overdue accounts.
• Send invoices promptly as soon as work is complete and offer multiple payment options, such as bank transfer, direct debit, and digital wallets, to reduce delays and make it as easy as possible for customers to pay you.
• Follow a structured collections process the moment an invoice becomes overdue, starting with a friendly reminder on day one and escalating to formal letters or debt collection if payment still does not arrive, so problem accounts never slip through the cracks.

What is an accounts receivable process?

The accounts receivable process is the system you use to track, collect, and manage money owed to your business by customers. It covers everything from vetting customers before you extend credit, to sending invoices, chasing late payments, and knowing when to write off bad debt.

A strong accounts receivable (AR) process keeps cash flowing into your business so you can pay suppliers, cover wages, and invest in growth.

When cash is tight, some businesses use outstanding invoices as security to borrow against, with discounters often willing to advance 75% of the outstanding amounts.

Why a solid accounts receivable process matters

Cash flow keeps your business running. A solid accounts receivable process keeps it flowing by ensuring customers pay on time and overdue invoices don't pile up.

Without a clear AR process:

• Cash shortages: You can't pay suppliers, wages, or rent.
• Wasted time: You spend hours chasing payments instead of running your business.
• Rising bad debts: Problem accounts go unnoticed until it's too late to recover the money.
• Mounting stress: Unpredictable income makes planning impossible.

With a consistent AR process:

• Faster payments: Clear terms and prompt invoicing reduce delays.
• Early problem detection: Tracking invoices lets you act before debts become uncollectable.
• Predictable cash flow: You know what's coming in and when.
• More time for growth: Less time chasing money means more time building your business.

How well you manage money owed to you often determines whether your business thrives or struggles.

The accounts receivable process: Step by step

The accounts receivable cycle follows a predictable sequence from the moment you agree to work with a customer to the point where you receive payment. Understanding the full flow helps you spot where your process might be breaking down.

The typical AR process includes these steps:

1. Vet the customer: Check their creditworthiness before extending credit
2. Agree payment terms: Put your billing and payment expectations in writing
3. Deliver goods or services: Complete the work you've agreed to do
4. Send the invoice: Bill the customer promptly with clear details
5. Track the invoice: Monitor payment status and due dates
6. Follow up on overdue payments: Send reminders and make calls as needed
7. Resolve disputes: Address any queries or disagreements quickly
8. Collect payment: Receive the money and reconcile it against the invoice
9. Handle bad debt: Write off uncollectable amounts when necessary

Each step in this process is an opportunity to improve your cash flow. Here's how to handle each step effectively.

Vet customers before extending credit

Vetting customers means checking their ability and willingness to pay before you agree to work with them. This simple step can save you months of chasing unpaid invoices.

Not every customer is a good fit for credit terms. Do some research before taking them on:

• Run a credit check: Find out if they have a history of paying on time.
• Call another supplier: Ask about their payment habits from someone who works with them.
• Check Companies House: Look for warning signs like late filings or county court judgments.

Set clear payment terms in writing

Payment terms are the rules that govern when and how your customers pay you. Putting them in writing before you start work protects you if disputes arise later.

Your payment terms should cover:

• Invoice timing: When you'll send the bill (on completion, monthly, or another schedule)
• Payment deadline: How many days the customer has to pay (14, 30, or 60 days are common)
• Late payment consequences: Interest charges (such as statutory interest at 8% plus the Bank of England base rate for B2B transactions), fees, or legal action for overdue accounts
• Accepted payment methods: Bank transfer, card, direct debit, or other options

Get your customer to sign off on these terms before you begin work. Written agreement removes ambiguity and gives you a clear basis for chasing payment.

Consider personal guarantees for business customers

A personal guarantee is a legal commitment from a business owner to pay a debt personally if their company cannot. It gives you an extra layer of protection when extending credit to small businesses.

With a personal guarantee in place, you can pursue the individual owner or the business if invoices go unpaid. This is particularly useful when dealing with limited companies, where the business itself may have few assets.

Be aware that some business owners may push back on signing one. Use your judgement based on the size of the contract and your assessment of the risk.

Once terms are agreed, you can begin the work.

Deliver goods or services

Complete the work you've agreed to do according to the agreed specifications and timeline.

Keep records of what was delivered and when. You'll need this documentation if disputes arise later. Delivery notes, signed receipts, and project completion records all serve as evidence that you fulfilled your side of the agreement.

Send invoices promptly

Prompt invoicing speeds up payment by starting the clock as soon as the work is complete. The longer you wait to send an invoice, the longer you wait to get paid.

Send your invoice as soon as possible after delivering goods or completing work. Your invoice should include:

• Clear description: What you provided and when
• Amount due: Broken down by line item if needed
• Payment deadline: The specific date payment is due
• Payment instructions: How to pay and where to send the money
• Your contact details: So the customer can reach you with questions

Accurate, detailed invoices reduce queries and disputes that can delay payment.

Offer convenient payment options

Offering multiple payment options makes it easier for customers to pay you quickly. The fewer barriers between your invoice and their payment, the faster you get paid.

Consider accepting:

• Bank transfer: The most common option for business-to-business (B2B) payments
• Debit and credit cards: Convenient for smaller amounts
• Direct debit: Ideal for recurring invoices or subscriptions
• Digital wallets: Apple Pay, Google Pay, and similar services
• Contactless in-person payments: Using Xero's Tap to Pay feature on your mobile phone

Choose the options that suit your customers and your business. The easier you make it to pay, the less time you spend chasing.

After sending invoices, you need to monitor their status.

Track all outstanding invoices

Tracking outstanding invoices means knowing exactly who owes you money, how much, and when it was due. Without this visibility, overdue payments slip through the cracks.

Keep a running list of every invoice you send and monitor it regularly. For each invoice, track:

• Customer name: Who owes you.
• Amount: How much they owe.
• Invoice date: When you sent it.
• Due date: When payment is expected.
• Status: Paid, pending, or overdue.

Check your bank account against this list to confirm payments as they arrive. An invoice stays on your watchlist until it's paid in full.

When invoices go past their due date, you need to take action.

Follow up on overdue payments

Following up on overdue payments is critical to maintaining cash flow. A structured approach ensures you treat all customers fairly while protecting your business.

Create a collections process

A collections process is a set of steps you follow when invoices go overdue. Having a clear plan removes guesswork and ensures you treat all late payers consistently.

Decide in advance what actions you'll take and when:

1. Day 1 overdue: Send a friendly email reminder
2. Day 7 overdue: Follow up with a phone call
3. Day 14 overdue: Send a formal letter stating consequences
4. Day 30 overdue: Consider using a debt collection agency or legal action

Stick to your process, but remain professional and courteous. Many late payments result from simple oversights rather than refusal to pay.

Resolve disputes quickly

Address any questions or disagreements about invoices as soon as they arise. Quick resolution prevents minor issues from delaying payment.

When a customer disputes an invoice, gather the facts and respond promptly with evidence. If the dispute is valid, issue a credit note or revised invoice immediately.

Collect payment and reconcile

When payment arrives, match it against the original invoice in your accounting system. This confirms which invoices are paid and updates your outstanding receivables.

Reconcile your bank account regularly to ensure all payments are correctly recorded and allocated.

Handle bad debt

Despite your best efforts, some debts will prove uncollectable. When you've exhausted all reasonable collection efforts, write off the bad debt.

Keep detailed records of your collection attempts in case you need to demonstrate that the debt is genuinely uncollectable for tax purposes.

FAQs on accounts receivable process

Here are answers to common questions about managing your accounts receivable process.

What's the difference between accounts receivable and accounts payable?

Accounts receivable is money owed to your business by customers. Accounts payable is money you owe to suppliers. AR brings cash into your business, while AP sends it out.

How long should I wait before chasing an overdue invoice?

Start following up as soon as an invoice becomes overdue. Send a friendly reminder on day one, then escalate with phone calls and formal letters if payment doesn't arrive.

Should I charge interest on late payments?

You're legally entitled to charge interest on late B2B payments. For business-to-business transactions in the UK, you can charge statutory interest at 8% plus the Bank of England base rate.

When should I write off a bad debt?

Write off a debt when you've exhausted all reasonable collection efforts and it's clear the customer won't or can't pay. Document your collection attempts for tax purposes.

What's the best way to reduce outstanding receivables?

Send invoices promptly, offer convenient payment methods, follow up on overdue accounts consistently, and vet customers before extending credit.