The Simplest Steps for Streamlining Your
AR Invoicing Process

What are the best practices for AR invoicing?

Anytime your company provides goods or services without requiring a full payment upfront, you will be invoicing against accounts receivable. If this process does not run smoothly, your company will spend significant time chasing unpaid balances and attempting to collect payments. Knowing best practices for AR invoicing and how to streamline this process, will save you time and make accounts receivable processing more efficient.

To make accounts receivable invoicing better, companies should have strong policies and processes in place. That includes regular review of AR, proactively managing invoices, ensuring customers have received and are processing invoices, and stick to their payment terms. Companies should also offer various payment methods, make invoices clear and understandable, and immediately apply customer payments.

What is the invoicing process?

First, companies must develop a credit application process to decide if a particular client is worth offering goods or services to, on credit. This must be part of a formal credit and collection policy so staff can follow guidelines. If no credit check is done, payment terms may be extended to a customer who might not pay back quickly, hurting your company’s cashflow.

Then, a billing clerk or someone similar views billing information to see what goods or services have been provided that require an invoice. An accounting clerk would create and send invoices to those identified by billing. Finally, someone must follow those invoices, investigating any issues and handling late payments.

Is accounts receivable the same as billing?

In some contexts, people use the terms accounts receivable and billing interchangeably. Billing is a part of accounts receivable, through which a customer is sent a physical or electronic bill.  Often, billing is more from the customer’s perspective, who adds these bills to their accounting software and later issues payments.

Which is better: accounts receivable or accounts payable?

Neither one of these departments is better or worse than another, but rather, each serves a different purpose. Accounts receivable is how a company tracks and collects money their customers owe them. Accounts payable are the funds the organization owes to others. Each side is responsible for either collecting or applying payments against open balances.

Should accounts receivable be higher than accounts payable?

If accounts receivable are less than accounts payable, the company may be collecting cash quickly but not servicing its obligations, meaning a larger liability. However, this also means the company has access to cash sooner and is not dependent on its customers paying more quickly. If the company owes less in accounts payable, than what it is owed in receivables, this means it can expect more cash inflows in the future, but also means the company is spending more cash to pay its bills than it is collecting. It is also important to keep an eye on the amount in accounts receivable to ensure that cash is flowing back.

Is accounts receivable a credit or debit?

Accounts receivable is an asset account. They should remain in a debit balance, with a payment on them being a credit. If a sale is made, revenue is credited and A/R is debited, while an incoming payment is applied as Debit Cash / Credit A/R.

What is a full-cycle AR?

Full cycle accounting refers to the complete set of activities the accounting department must do over a reporting period. Full cycle accounts receivable is the full set of transactions associated with this business activity. For example, a customer applies for credit, is approved, buys something, a bill is generated, they are invoiced, they pay, the payment is processed.

How do I calculate AR turnover?

Accounts receivable turnover is the number of times in a year that a business collects its average accounts receivable. This shows how efficiently your company can collect on credit lent to customers.

To calculate AR turnover, take the beginning and ending accounts receivable, add them up and divide by two. This gives you the average accounts receivable for that period. Then, divide that figure into the net credit sales for the year to get your average AR turnover.

What is the average collection period?

The average collection period is the amount of time it takes to receive payments owed by your clients. This figure shows how effective your accounts receivable management practices are. A lower average collection period is ideal.

How are AR days calculated?

Accounts receivable days indicate how long it takes to clear all of your accounts receivable, which lets you know your short-term receiving efficiency. The accounts receivable days formula is simple. Simply take accounts receivable and divide it by revenue, then multiply it by the number of days in a year.

What is Days Sales Outstanding (DSO)?

Days Sales Outstanding (DSO) represents the average number of days between when an invoice is issued and when payment is received from the customer. A lower DSO is better, because this means customers are paying their invoices more quickly. A higher DSO means it takes a long time to collect cash on revenue. This could create a cashflow issue if the company is spending on personnel or other bills, while not yet receiving payment from customers.

How do I calculate Days Sales Outstanding (DSO Formula)?

DSO is usually calculated from the past 12 months (Trailing Twelve Months, TTM) in average AR for the period. We calculate average AR by our (Ending AR balance – Starting AR balance)/(# of months). We then divide this amount by our total credit sales in the period, and then multiply by the number of days in the period (if 12 months, then 365; or a shorter period analysis).

Why is it important to manage accounts receivable? 

If you are not actively, carefully managing accounts receivable, your company is in danger. AR leads to cash flow, which you need to pay debts, invest in business growth, and otherwise meet your goals. Failing to manage accounts receivable leads to issues like missed payments, unsent invoices, and ultimately, no or low cash flow.

What are the most important goals of AR?

AR’s biggest role is to bring that cash flow into the business. The department should be aware of, and watching, key performance indicators like AR days and turnover. 

AR should also have a goal of maintaining accurate customer data and establishing a clear and understandable credit approval process. Ultimately, accounts receivable should have a goal of a streamlined, optimized, efficient system for payments and collections.

What happens if accounts receivable increases? 

Accounts receivable increasing is generally not a good thing. It means that more customers are purchasing on credit and have not paid for all of the credit sales. This removes cash flow from your company’s net income, and if it gets too high, it represents a big problem.

What causes AR to increase?

Accounts receivable increases when more people are paying on credit and/or not paying their bills quickly. This is a drain on your cash flow and should be resolved as soon as possible.

What does receivable days decreasing mean?

If accounts receivable days decrease, you are looking at debtors paying for their credit purchases faster. This reduces the amount of time between issuing an invoice and receiving payment.

However, if your accounts receivable turnover is decreasing, that means your company is dealing with more late or delinquent clients. If it increases, you are effectively processing credit.

What are the methods used to collect accounts receivable?

There are a variety of ways to collect accounts receivable. Of course, sending a simple invoice with a mix of payment options, including cash, check, or credit card, or ACH / direct bank debit, is the first step. Then, companies may need to take one of several other approaches to collect if the client does not pay the invoice.

A phone call or email indicating that an account is overdue and must be paid is usually the first step. Companies might focus on the highest-value outstanding bills to quickly clear overdue receivables. If your sales department is connected with these individuals, this can also be a good way to use existing relationships to get paid.

If a client is still not paying, your company might need to move on to repossessing the or discontinuing services, if possible. You may require the assistance of a law firm or collections agency if they are not paying. Sometimes a legal warning is all it takes, while other situations require a collections agency or filing a claim in court.

What do you say when collecting accounts receivable? 

It can feel uncomfortable to make a collections call, especially if one must call a client who is usually a good customer. Knowing what to say can help.

Be prepared with the invoice and any other documentation such as proof of delivery, and with any notes on the customer or this invoice. Introduce yourself, then cover all of the important information, including the invoice number, amount due and due date.

A customer might tell you that the payment is in the mail, and if so, confirm when they sent it. If payment has not been sent, confirm they have the invoice and ask when they will pay. Set a date for your expected payment and take notes of everything discussed during the call.

Be ready to respond to excuses or justification for why payment has not been sent. For example, if they say they didn’t receive an invoice, it’s your opportunity to email an invoice and have them confirm receipt while talking.

It is okay to remind those who are late on payment of the potential consequences of their failure to pay. Stay calm and focused, while letting them know that there could be ramifications like legal action or reporting to a credit bureau.

How can I improve my AR process?

Improving the accounts receivable invoicing process comes down to a strong understanding of your accounts, and having the information needed to take action. You need to understand the payment status of all of your customers using metrics like AR turnover calculations. This lets you see problems developing before they truly take hold.

A proactive approach ensures your clients are well aware of when their payments are due long before it becomes a problem. Make it as easy as possible for your clients to pay invoices, providing clear, complete documentation and appropriate methods of payment.

Move quickly when a receivable goes into the past due stage, as the longer a payment goes uncollected, the less likely it will be paid. Contact clients as soon as a payment is late and ensure that they understand any policies or consequences around late payments.

How do you reduce days in accounts receivable?

By reducing accounts receivable days, companies can better collect payment promptly. So, how do you reduce the days spent in account receivable and get this metric looking great?

First, make sure that your credit policy is helping your efforts and not a hindrance itself. If credit terms are very loose or weak, clients who are less likely to pay are extended risky credit. Understand your clients’ financial situations and carefully consider who gets to pay with credit.

Work quickly and proactively, monitoring the state of payments and accounts and connecting with customers early. Resolve any issues that come up as quickly as possible, and reduce the chance of invoice problems with clear, detailed invoicing.

You may benefit from collections software or technology, or even assistance in billing and collections. Especially for small businesses, having to spend time on collections takes away from key business goals. It also does not make for a very proactive approach, as those responsible for accounting are stretched trying to meet competing priorities and timelines.

Can you outsource accounts receivable invoicing?

If you read the last paragraph above and feel like it describes your business well, outsourcing accounts receivable invoicing might be a solution. 

It is clear that carefully and proactively managing outstanding invoices is the best way to ensure your company is not saddled with debts. However, it’s a lot of work to do that, and if your business is small or your accounting department is maxed out, you need help. Outsourcing accounts receivable invoicing allows your company to efficiently, effectively collect on debts, without having to devote your own time and resources to it.

By outsourcing, your company gets cash flow in order, which gives you more options for business growth and strategizing. It ensures that any outstanding invoices are followed quickly and effectively, so a late payment does not turn into a bad debt down the road. Outsourcing reduces overdue accounts, decreases days spent in receivable, and takes the pressure off of your staff.

Outsourced accounts receivable services come in many forms, from reminder calls, dunning letters, and collections as needed, to a more strategic accounting approach. Your outsourced partner can do the logistical work of collections, or they can work with you to analyze AR metrics and come up with better systems. It all depends on what level of service your business needs.

You may wonder if outsourcing accounts receivable invoicing is a wise move, financially. As the saying goes, sometimes you must spend money to make money. Outsourced AR invoicing is predictable and affordable and can bring your cash flow back into balance and ensure greater financial stability in the long term. 


We are here to help you understand and improve all aspects of accounting and payroll. Our team understands how to make accounts receivable invoicing work better for your business. To learn more about how we can make your business better, get in touch today using our online form, calling our number below, or emailing us at our email below. 

*This blog does not constitute solicitation or provision of legal advice and does not establish an attorney-client relationship. This blog should not be used as a substitute for obtaining legal advice from an attorney licensed or authorized to practice in your jurisdiction.*

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