Accounts receivable process: 7 steps to get paid faster

Published Thursday 16 April 2026

Table of contents

• What is an accounts receivable process?
• The accounts receivable cycle: A complete overview
• Evaluate customer creditworthiness
• Set clear payment terms upfront
• Create and send invoices promptly
• Track payment status
• Manage collections and late payments
• Handle invoice disputes
• Know when to write off bad debt
• FAQs on accounts receivable processes

Key takeaways

• Evaluate customer creditworthiness before extending credit by running credit checks, requesting trade references, and considering personal guarantees to avoid payment problems later.
• Send invoices immediately after completing work or delivering products, and include all essential details like payment deadlines, accepted payment methods, and clear contact information to speed up payment.
• Create a consistent collections process with specific timelines, starting with a friendly reminder on day one past due and escalating to phone calls and formal notices at set intervals.
• Track payment status daily by maintaining an invoice watchlist, checking your bank account regularly, and reviewing aging reports weekly to catch overdue invoices before they become major collection problems.

What is an accounts receivable process?

The accounts receivable (AR) process is the system your business uses to collect payments customers owe for goods or services you've already delivered. It covers evaluating new customers, sending invoices, tracking payments, and following up on overdue accounts.

A strong AR process helps you get paid faster, maintain healthy cash flow, and spend less time chasing money.

The accounts receivable cycle: A complete overview

The accounts receivable cycle is the sequence of steps from when a customer places an order until you receive full payment. Understanding each stage helps you spot where payments get stuck and fix bottlenecks faster.

The AR cycle includes seven key stages:

• Credit evaluation: Assess whether a new customer is likely to pay on time
• Payment terms: Establish clear expectations before work begins
• Invoicing: Create and send accurate bills promptly
• Payment tracking: Monitor which invoices are paid, pending, or overdue
• Collections: Follow up on late payments with a consistent process
• Dispute resolution: Address customer questions or disagreements quickly
• Bad debt management: Write off uncollectible accounts when necessary

Each step covers one stage of the cycle. Follow them in order to build a process that protects your cash flow and reduces the time you spend chasing payments.

Step 1: Evaluate customer creditworthiness

Evaluating customer creditworthiness helps you avoid extending credit to businesses that pay late or not at all. A few minutes of research upfront can save you months of collection headaches.

A U.S. Government Accountability Office report identified common reasons lenders cited for denying credit, including poor payment history and the fact that 46 percent were cited as having insufficient collateral for a conventional loan.

Here's how to assess a new customer's payment reliability:

• Run a credit check: Review their business credit report to see payment history and risk rating
• Request trade references: Contact other suppliers the customer has worked with to verify on-time payment
• Consider a personal guarantee: Ask small business owners to sign a personal guarantee so you can pursue them or the business for unpaid debts

Step 2: Set clear payment terms upfront

Clear payment terms protect your business by setting expectations before work begins. Put everything in writing and get your customer's agreement before you start.

Your payment terms should include the following key elements:

• Payment deadline: Specify when payment is due, such as net 30 or net 15
• Billing schedule: State when you'll send invoices, whether after each project or on a recurring date
• Late payment consequences: Outline interest charges, fees, or legal action for overdue accounts
• Accepted payment methods: List how customers can pay you

Step 3: Create and send invoices promptly

speeds up your cash flow by starting the payment clock immediately. Send your invoice as soon as you complete the work or deliver the product.

To get paid faster, make sure your invoices are clear and easy to act on:

• Include all essential details: List the work completed, amount due, payment deadline, and your contact information
• Double-check for accuracy: Verify all figures and details to prevent delays from customer questions
• Offer multiple payment options: Accept credit cards, debit cards, bank transfers, and digital wallets to remove friction

Simplify payments with Xero's Tap to Pay on the Xero Accounting App. You can accept contactless payments in person using just your phone.

Step 4: Track payment status

Tracking payment status shows your cash flow in real time and helps you catch overdue invoices before they become collection problems.

Stay on top of your receivables by following these practices:

• Maintaining an invoice watchlist: Track every invoice until it's paid in full
• Checking your bank account daily: Confirm payments as they arrive and update your records
• Reviewing aging reports weekly: Identify invoices approaching or past their due dates

Accounting software like Xero can automate much of this tracking, showing you at a glance what's been paid and what's outstanding.

Step 5: Manage collections and late payments

Managing collections effectively means following a consistent process for every overdue account. When you treat each situation the same way, you spend less time deciding what to do and more time getting paid.

Government audits show that nearly a third of lenders (31 out of 97 reviewed) failed to consistently document key borrower qualifications, which leads to collection problems.

Create a follow-up schedule and stick to it:

1. Day one past due: Send a friendly email reminder with the invoice attached
2. Day seven past due: Call to confirm they received the invoice and ask when to expect payment
3. Day 14 past due: Send a formal past-due notice outlining late fees or interest
4. Day 30 past due: Call directly to discuss payment arrangements
5. Day 60+ past due: Consider involving a collection agency or pursuing legal action

Don't try to handle everything by email. Phone calls show you're serious and give customers a chance to explain delays or raise concerns.

For customers who are habitually late, review their payment history and consider changing their terms:

• Require upfront deposits: Collect partial payment before starting work
• Shorten payment windows: Move from net 30 to net 15 or due on receipt
• Stop extending credit: Require payment at time of purchase for repeat offenders

For more guidance on following up with customers, see Chasing outstanding invoices.

Step 6: Handle invoice disputes

Invoice disputes occur when customers question the amount, timing, or validity of a bill. Resolve disputes quickly to keep your AR process moving and protect customer relationships.

When a customer disputes an invoice, follow these steps to resolve the issue quickly and professionally:

• Respond promptly: Acknowledge the dispute within 24–48 hours
• Verify the claim: Review the original agreement, work completed, and invoice details
• Communicate clearly: Explain your findings and propose a resolution
• Document everything: Record all communications and any adjustments made
• Update the invoice if needed: Issue a corrected invoice or credit memo to close the matter

Not every dispute is legitimate. Some customers use disputes to delay payment. If your records confirm the invoice is accurate, stand firm while remaining professional.

Step 7: Know when to write off bad debt

Writing off bad debt means accepting that a customer won't pay and removing the amount from your accounts receivable. It's a last resort, but knowing when to stop collection efforts saves time and lets you focus on collectible accounts.

Formal accounting principles govern this process. Bodies like the Financial Accounting Standards Board (FASB) regularly issue updates, such as the December 2024 proposed update on the Measurement of Credit Losses for accounts receivable.

Recognizing when a debt is unlikely to be collected helps you decide when to stop pursuing payment. Signs a debt may be uncollectible include:

• The customer has filed for bankruptcy
• Multiple collection attempts over 90 days have failed
• The cost of continued collection efforts exceeds the debt amount
• The customer's business has closed permanently
• Legal counsel advises the debt is unenforceable

When you decide to write off a debt, document your decision and the steps you took to collect. This documentation protects you if you're audited and helps you refine your credit evaluation process to avoid similar losses.

Use Xero to streamline your accounts receivable

Xero makes it easier to manage every step of your accounts receivable process. Create and send invoices in minutes, track payment status automatically, and see exactly who owes you money at any time.

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FAQs on accounts receivable processes

Here are answers to common questions about managing accounts receivable.

How long should I wait before writing off a bad debt?

Most businesses wait 90 to 180 days after exhausting all collection efforts. However, the timeline depends on your industry, the debt amount, and whether the customer has declared bankruptcy or closed their business.

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

Accounts receivable represents money customers owe you for goods or services you've delivered. Accounts payable represents money you owe to suppliers and vendors for goods or services you've received.

Should I offer early payment discounts?

Early payment discounts can improve cash flow by encouraging customers to pay sooner. Common terms include 2/10 net 30, which means customers receive a two percent discount if they pay within 10 days instead of the standard 30 days.

How can I reduce my days sales outstanding (DSO)?

Reduce DSO by sending invoices immediately after delivery, offering multiple payment methods, following up promptly on overdue accounts, and evaluating customer creditworthiness before extending credit.

When should I hire a collection agency?

Consider hiring a collection agency after 60 to 90 days of unsuccessful internal collection efforts. Collection agencies typically charge 25 to 50 percent of the amount collected, so use them for larger debts where the recovery amount justifies the cost.