Accounts Receivable Management

Accounts receivable (AR) refers to the amounts owed to a business by its customers for goods or services that have been delivered (or performed) but not yet paid for. Because the business has a legal (or contractual) right to receive payment, these amounts are recorded as an asset on the company's balance sheet.

In accounting terms, accounts receivable are considered current assets since they are typically expected to be converted into cash within one accounting cycle (usually within a year).

How the accounts receivable process works

While specifics may vary, below is a typical AR workflow:

• Sale on credit / service delivered: The company provides goods or services to a customer under a credit arrangement (i.e., without immediate cash payment)
• Invoice issuance: The business issues an invoice that states the amount due, payment terms (e.g. “net 30” meaning due in 30 days), late fees and other conditions
• Recording AR in ledger / system: The invoice value is recorded in the AR account (debit AR, credit revenue)
• Tracking: The business monitors outstanding invoices: how many days past due, who owes what, etc.
• Follow-up / collection efforts: If payment isn't received by the due date, reminders or escalation processes may be applied
• Receiving payment / settlement: When payment arrives (by check, ACH, credit card, etc.), the AR account is credited and cash or bank account is debited
• Bad debt write-off or allowance: If an invoice becomes uncollectible, the business may write it off (or use an allowance for doubtful accounts) to adjust net AR

Why accounts receivable matters for small businesses

Managing accounts receivable effectively is critical for keeping a small business running smoothly. Reliable collections help maintain steady cash flow, ensuring there is money available to cover financial obligations.

Strong AR practices also support accurate financial reporting, since overstated receivables can distort a company's true performance. Offering flexible payment terms can build customer trust, but doing so responsibly requires careful oversight.

In addition, lenders often review AR turnover and collections history when evaluating credit applications, making disciplined AR management an important factor in gaining access to financing.

Common challenges with accounts receivable management

Some small businesses may encounter hurdles in their accounts receivable process. For example, late or missed payments can quickly lead to cash flow gaps that put pressure on daily operations.

A high Days Sales Outstanding (DSO) ratio is another common issue, signaling that collections are taking too long. Errors on invoices or disputes over charges can delay payments, while reliance on manual processes increases the risk of mistakes. In some cases, unpaid balances eventually become uncollectible, leading to bad debt write-offs that reduce profitability.

Best practices for managing accounts receivable

Improving accounts receivable performance starts with setting clear payment terms at the beginning of a customer relationship. Businesses that communicate expectations around due dates, credit limits, and late fees upfront may be less likely to face disputes later.

Sending invoices promptly and ensuring they are accurate can also reduce the chances of delays. Accounting software can automate reminders and streamline recordkeeping. Additionally, offering multiple payment options—such as ACH, credit card or online portals—makes it easier for customers to settle accounts on time.

Timely follow-up is equally important; sending reminders before the due date and reaching out quickly after a payment becomes overdue can improve collection rates. Regularly monitoring aging reports helps identify trends that might signal future risk.

Finally, aligning sales, customer service, and finance teams helps ensure everyone understands the company's credit policies and can work together to resolve disputes quickly.

Disclosure: This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.