Accounts Receivable Management

01Purpose and scope

• This manual supports the course Accounts Receivable Management. It describes how the work is actually done inside a finance or credit team that extends payment terms to customers and depends on those customers paying on time. It is meant as a reference for analysts, collectors, credit managers, billing staff, and the controllers who review their output.
• The scope covers the full cycle from the decision to extend credit through invoicing, payment application, collection activity, dispute handling, write-offs, and the estimate of amounts that will not be collected. It does not cover revenue recognition policy in depth, payroll related receivables, or intercompany balances, although those areas touch the same ledger and sometimes the same people.
• This guidance does not replace qualified professional judgment, approved company procedures, or any authorization required by your employer, auditors, or lenders. Collection conduct rules, credit reporting obligations, and tax treatment of bad debts depend on jurisdiction and on the type of customer, so confirm the current requirements with your legal counsel, tax adviser, or the relevant regulator before acting on anything here.

02Core principles

• Accounts receivable work rests on a simple idea: the company has delivered goods or services and is owed cash on an agreed schedule. Every decision in the function either protects the expected cash, speeds it up, or records honestly how much of it will not arrive. When a step does none of those things, it is usually overhead that should be questioned.
• Credit exposure should be deliberate. Each customer account should have a stated limit, a payment term, and an owner who can explain why those numbers are reasonable. Limits drift if nobody reviews them, and an account that grew from a small first order to a large standing balance often has no one currently responsible for its risk.
• Collections are a sequence, not a single phone call. The usual pattern is reminders before the due date, prompt contact when an invoice is missed, escalation to a named customer contact, and a decision point about holding shipments, renegotiating terms, or referring the balance for outside action. The right sequence depends on the customer's size, the contract, and the local rules that apply.
• Accuracy of the subledger matters as much as speed. A customer who paid but shows as past due will call, dispute, and lose trust in the process. Cash that is received but unapplied distorts aging and can lead to reserves that are too high or too low. Treat the aging report as a working tool that has to be reconciled, not as a fact that speaks for itself.

03Planning and preparation

• Before the function runs day to day, the team needs a written credit policy, payment terms by customer type, a collections calendar, and an agreed definition of what counts as past due, disputed, or in dispute review. Many problems later trace back to terms that existed in sales conversations but never reached the billing system.
• Set up the customer master data carefully. Legal entity name, billing address, tax identification where applicable, remit-to details, payment terms, credit limit, currency, and the contact who receives statements all need to be right at setup. Changes should go through a documented approval step, because a wrong remit-to address or a changed bank account is a common route for payment fraud.
• Decide early which reports will drive the work. A standard set usually includes an aging report by customer and by invoice, a cash application exceptions list, a dispute log, a broken promises report showing customers who agreed to pay on a date and did not, and a summary of write-off requests. Agree on how often each one is produced and who reviews it.
• Plan for different contexts. A business that sells to a few large corporate buyers on negotiated terms works differently from one that sells to thousands of small accounts through an online checkout. Large accounts need relationship management and documented contract terms. Small accounts need automation, clear reminder templates, and tight limits on open exposure. Mixed portfolios often need both, with segmentation rules that decide which track a customer falls into.

04Recommended workflow

1. 1
   : Assess the customer before extending credit. Collect the application, trade references, financial statements where available, and any public filings for larger entities. Compare the requested limit with the company's exposure tolerance and the customer's stated ability to pay. Record the decision and the reason, including conditions such as a deposit or a shorter term.
2. 2
   : Set up the account and confirm the terms in writing. Enter the limit, term, currency, and contacts in the billing system. Send the customer a confirmation that states the payment terms, remit-to details, and how disputes should be raised. Mismatches between the contract and the system are easiest to fix at this point.
3. 3
   : Invoice accurately and on time. Invoices should match the signed order or contract, reference the purchase order number where the customer requires one, and show tax and currency correctly. Late or incorrect invoices are one of the most common reasons customers delay payment, so billing errors should be measured and fixed at the source.
4. 4
   : Apply cash promptly. Match incoming payments to open invoices using remittance advice, reference numbers, and bank detail. Unapplied cash should be reviewed within a short, agreed window. Partial payments need a rule for how they are allocated and whether the customer has indicated which invoices they intend to settle.
5. 5
   : Monitor aging and prioritize. Review the aging report on a set schedule. Group balances into buckets such as current, early past due, and seriously past due. Sort collection effort by balance size and risk rather than by who called last. A small number of large balances often accounts for most of the cash at risk.
6. 6
   : Contact the customer and record every touch. Start with a reminder to the accounts payable contact on the statement, then speak with the person who approves payment if the balance remains open. Note the date, the person spoken to, what was promised, and any stated reason. Promises to pay should be tied to a specific amount and date.
7. 7
   : Resolve disputes quickly. When a customer disputes an invoice, log it, assign an owner in billing or operations, and set a target for resolution. Do not let disputed amounts sit on the aging report indefinitely without a status. Separate the undisputed portion, which should be collected, from the disputed portion, which should be investigated.
8. 8
   : Escalate and decide on hold or referral. If contact fails and promises are broken, escalate to the credit manager and sales owner. Options include placing the account on credit hold, requiring prepayment for new orders, restructuring the balance with a signed plan, or referring the account to a collection agency or counsel. Each option has contractual, relationship, and legal consequences that should be weighed before action.
9. 9
   : Write off or reserve when recovery is unlikely. Balances that are no longer expected to be collected should be reviewed against the company's write-off policy and approved at the appropriate level. Record the estimate of uncollectible amounts as a reserve before the write-off is final, using the method your accounting policy and auditors accept.

05Quality checks, risk controls and compliance

• Reconcile the receivables subledger to the general ledger every period. Differences usually come from unapplied cash, timing of postings, or manual journal entries that bypass the billing system. Investigate any difference that is not explained by a known timing item, and keep the reconciliation signed by the preparer and reviewer.
• Segregate duties where the team is large enough to do so. The person who approves credit limits should not be the only person who can change them in the system. The person who applies cash should not also approve write-offs of the same accounts without review. In small teams, compensating controls such as monthly review of credit memos and write-offs by a controller are common.
• Control credit memos and adjustments. Credit memos reduce what the customer owes and are a frequent source of leakage. Require a documented reason, an approver above the person who created the credit, and a link to the original invoice or dispute. Review credit memo volume by customer and by employee as part of routine monitoring.
• Protect against payment fraud. Verify changes to remit-to bank details through a call-back to a known contact, not through the email that requested the change. Be alert to customers who suddenly ask to pay to a new account or who send payments from accounts in names that do not match the customer.
• Respect collection conduct rules. Contact frequency, times of day, permitted communication channels, and statements about consequences are regulated in many places. In the United States, the Fair Debt Collection Practices Act applies to consumer debts, and state laws may add requirements. Business to business collections are generally subject to different rules, but contract terms and certain state laws still apply. Check current requirements with counsel for your jurisdiction.
• Consider the accounting and tax treatment of reserves and write-offs. Estimates of uncollectible amounts involve judgment about customer condition, aging, and economic conditions. Auditors will ask for the basis of the estimate and evidence that it was reviewed. Tax rules for deducting bad debts differ by jurisdiction and by method, so coordinate with the tax function before taking a deduction.
• These controls do not replace the judgment of a qualified credit professional, the approval process your organization requires, or any authorization from a regulator, lender, or auditor.

06Collaboration and documentation

• Accounts receivable depends on sales, operations, legal, and customer service. Sales owns the relationship and often knows why a payment is late. Operations knows whether goods were delivered as invoiced. Legal owns contract terms and any referral to outside counsel. Set up a regular meeting, usually weekly for large portfolios, where the top open balances and disputes are reviewed with named owners.
• Keep one record of truth for each account. Notes should capture who was contacted, what they said, what was promised, and what internal action was taken. Notes written in personal email or spreadsheets that disappear when someone leaves the team are a common source of rework and audit findings.
• Document the credit policy, collection procedures, dispute resolution steps, and write-off approval matrix. Review these documents when the business changes its terms, enters a new market, or adopts a new billing platform. A procedure that describes how the team worked three systems ago is worse than none, because people follow it anyway.
• When sales wants a higher limit or extended terms for a strategic account, the request should go through the same review as any other. Document the business reason, the exposure, and the approval. Credit decisions made under sales pressure without records are hard to defend later when the account goes bad.

07Measures and continuous improvement

• Track a small set of indicators and review them consistently. Days sales outstanding shows how long, on average, cash takes to arrive relative to sales. The percentage of receivables in each aging bucket shows where the risk sits. The percentage of invoices disputed, average dispute resolution time, and the share of cash applied within the agreed window show how well the process runs. Collection effectiveness, which compares cash collected with the amount that was collectible, is useful when calculated the same way every period.
• Read these indicators in context. Days sales outstanding can fall because a company tightened terms and lost sales, or rise because a large customer changed its payment cycle. Average figures hide concentration, so look at the top customers separately. Trends over several periods are more informative than a single month.
• Use the results to change the process. If disputes are concentrated in one product line, the problem is often in pricing or order entry, not in collections. If a particular collector has high broken-promise rates, the issue may be the customer segment assigned to that person rather than the collector. Track whether changes actually reduced the problem, and drop changes that did not.
• Review the reserve estimate against actual outcomes. Compare amounts reserved in prior periods with amounts that were later written off or recovered. Large or persistent gaps signal that the method or its inputs need work. Share these findings with the controller and the credit committee where one exists.

08Common mistakes and how to prevent them

• Extending credit without a written assessment is the most expensive mistake. It often happens when a strong sales relationship pushes an order through before anyone checks the customer. Prevent it with a hard rule that orders above a set threshold cannot release until a credit decision is recorded.
• Letting unapplied cash build up hides real delinquency. Customers appear to owe money they have already paid, and the collections team chases them unnecessarily. Set a deadline for applying cash and review the unapplied report at each close.
• Chasing the wrong contact wastes time and damages relationships. A statement sent to a general inbox may never reach the person who approves payment. Confirm the accounts payable contact and the approver for each large account, and update them when they change.
• Accepting vague promises to pay. Telling a collector that a check is in the mail is not a commitment. Require a specific amount, a date, and a method, and check whether the promise was kept.
• Writing off balances without review. Write-offs made to clean up the aging report weaken the reserve estimate and can hide fraud or billing errors. Require documented collection attempts and approval before a write-off is posted.
• Treating disputes as collection problems. Customers often withhold payment on disputed invoices, but the dispute may be valid. Route disputes to the owner who can fix the underlying issue, such as an incorrect price or missing proof of delivery, and do not pressure the customer to pay the disputed amount while the review is open.
• Ignoring concentration risk. A portfolio can look healthy in total while one customer holds a large share of the balance. Review the top ten exposures separately each period and set limits on how much any single customer can owe.

09Practical checklist

• Confirm each new customer has a documented credit decision, limit, and payment term before the first order releases.
• Verify the customer master data, including remit-to details and the accounts payable contact, and confirm any bank detail change by a call-back to a known contact.
• Check that invoices match the signed order or contract and reference the purchase order where required.
• Apply incoming cash within the agreed window and review unapplied cash at each close.
• Review the aging report on schedule and prioritize collection effort by balance size and risk.
• Record every customer contact with date, person, outcome, and any promise to pay with amount and date.
• Log each dispute, assign an owner, set a resolution target, and separate the undisputed amount.
• Approve credit memos and adjustments above a set threshold through someone other than the preparer.
• Reconcile the receivables subledger to the general ledger each period and investigate unexplained differences.
• Review the reserve estimate against actual write-offs and recoveries, and document the basis for any change.
• Confirm current collection conduct and tax rules with counsel or a tax adviser for each jurisdiction where the company collects.

★Learning sources

• Micro Degree: Accounts Receivable Management
• Micro Degree: Accounts Payable Management
• Micro Degree: Bank Reconciliation Operations
• Micro Degree: FinTech Fundamentals