What is accounts receivable management? How to improve it and best practices

Managing your Accounts Receivable (AR) effectively is essential for keeping your business financially stable and profitable.

When payments come in on time, you maintain a steady cash flow, reduce the risk of bad debt, and strengthen customer relationships by ensuring a smooth billing experience.

However, without a solid accounts receivable management strategy, your business may struggle with delayed payments, cash flow shortages, and increased operational stress—all of which can hinder growth and profitability.

In this guide, you’ll learn what AR management is, why it’s crucial for your business, best practices to improve it, and how automation helps you streamline your processes for faster collections and healthier financial performance.

Here’s what we’ll cover:

What is accounts receivable management?

AR management refers to tracking, invoicing, and collecting payments from customers who purchase goods or services on credit.

It makes sure your business receives payments on time, minimises the risk of unpaid invoices, and maintains a steady cash flow.

It issues invoices promptly, monitoring outstanding balances, sending payment reminders, and handling collections when necessary.

Key components of accounts receivable management

A successful AR management process helps ensure payments are on time and offers greater financial stability.

Here are the four essential components:

1. Invoicing

Timely, accurate invoicing is the foundation of a smooth accounts receivable process.

Each invoice should clearly outline payment terms, due dates, and accepted payment methods to prevent confusion and delays.

2. Payment tracking

Tracking incoming payments makes sure invoices are settled on time.

Using AR-specialised software to automate this process reduces errors, improves efficiency, and helps you stay on top of outstanding balances.

3. Collection processes

When customers miss payment deadlines, a structured collections strategy is essential.

This may involve sending reminders, negotiating payment plans, or escalating overdue accounts to a collection agency when necessary.

4. Reconciliation

Regular reconciliation ensures that recorded payments match actual bank deposits.

This step helps identify discrepancies, detect errors, and reduce the risk of fraud.

Why is accounts receivable management important?

Understanding the importance of AR management is key to maintaining a financially stable business.

Mismanagement can lead to cash flow problems, reduced profitability, and strained customer relationships.

Here are the key advantages to using tailored AR management solutions:

Prevents cash flow shortages

Late or missed payments can disrupt cash flow, making it harder to cover essential expenses like payroll, rent, and operational costs.

Reduces financial risk

Poor AR tracking increases the likelihood of bad debt and revenue loss, directly impacting your bottom line.

Improves customer relationships

Clear, structured AR process reduces billing disputes, fosters transparency, and helps maintain strong client relationships.

Enables business growth

A steady, predictable cash flow allows you to invest in expansion, innovation, and improved services without financial uncertainty.

Accounts receivable best practices

These best practices will help you streamline your AR process, reduce late payments, and improve efficiency.

1. Standardise and document AR procedures

Create clear, standardised guidelines for invoicing, payment terms, and follow-ups.

Making sure your team follows the same process promotes consistency and reduces errors.

2. Establish a structured collections process

Define a proactive collections strategy that includes payment reminders, escalation procedures, and late payment penalties.

This method helps you recover outstanding balances without damaging customer relationships.

3. Offer multiple payment options

The easier you make it for customers to pay, the faster you’ll receive payments.

Provide flexible options like credit card payments, online transfers, and automated billing.

4. Leverage AI and OCR for faster processing

AI-powered AR software can automate invoice generation, payment reminders, and reconciliation, cutting down on manual work.

Optical Character Recognition (OCR) technology extracts data from invoices and receipts, eliminating errors and speeding processing times.

How to improve accounts receivable management?

Even with a structured AR process, there’s always room to optimise how you manage accounts receivable.

Here’s how to refine your AR strategy:

1. Implement an effective AR process

• Set clear credit policies to minimise risk.
• Define payment terms (e.g., net 30, net 60)
• Screen customers’ creditworthiness before extending payment terms.

2. Automate invoicing and payment reminders

• Use AR automation tools to send invoices and reminders automatically.
• Set up auto-pay options to encourage timely payments.
• Reduce reliance on manual follow-ups to improve efficiency.

3. Utilise an accounts receivable management system

A well-structured accounts receivable management process relies on the right tools.

A good AR management system helps your business streamline invoicing, track payments, and automate collections.

Using accounts receivable management solutions help your team to:

• Automate invoice creation and distribution for faster processing.
• Track outstanding balances in real-time to monitor overdue accounts.
• Send payment reminders and late fee notifications to improve collection rates.

4. Track and analyse AR metrics

Monitoring the following Key Performance Indicators (KPIs) will help you identify inefficiencies and optimise your AR processes:

• Days Sales Outstanding (DSO): measures the average time it takes to collect payments.
• Aging reports: categorises outstanding invoices by overdue periods (e.g., 30, 60, 90+ days).
• Collection Effectiveness Index (CEI): tracks the efficiency of your collections process.

5. Strengthen customer relationships for faster payments

Strengthening your client or customer management can lead to faster, more reliable payments. Here’s how to encourage timely payments and grow your relationship with your clients:

• Maintain clear communication about payment expectations.
• Send friendly reminders before due dates to keep payments on track.
• Offer incentives for early payments, such as discounts, to encourage prompt transactions.

Challenges of accounts receivable management

Even with a strong AR process in place, challenges can still arise.

Here are some common obstacles your business may face:

Late payments

Poor communication between your AR team and customers can lead to payment delays.

Financial difficulties, poor cash flow management, or simply forgetting due dates can also contribute to late payments.

Invoice disputes

Errors in invoicing—such as incorrect amounts, missing details, or mismatched purchase orders—can lead to delays while issues are resolved.

High Days Sales Outstanding (DSO)

When invoices take too long to be paid, the cash conversion cycle extends, making it harder to cover operational costs and invest in growth.

Difficulty accessing real-time data

Without a centralised system, tracking outstanding invoices and monitoring AR performance in real time can be challenging, leading to inefficiencies in collections and decision making.

Optimise your accounts receivable turnover for better cash flow

Staying ahead of AR challenges is essential for maintaining healthy cash flow.

Keep an eye on your accounts receivable turnover ratio—the speed at which your business collects outstanding invoices.

A high turnover ratio means faster payments, stronger cash flow, and lower risk of unpaid debts.

Looking to improve your AR turnover?

Choose an AR management system that accelerates collections, minimises errors, and makes real-time financial insights easier.

For example, Sage AR management software can:

• Automate payment reminders and follow-ups to speed up collections.
• Reduce manual errors with AI-powered reconciliation and smart invoicing.
• Monitor outstanding invoices and key metrics using real-time AR dashboards.

By combining best practices with automation, you can boost cash flow, lower financial risks, and maintain strong customer relationships.

If you’re ready for a simpler, more efficient AR process, explore Sage accounts receivable software and take control of your business finances with confidence.

Accounts receivable management FAQs

1. What does an accounts receivable manager do?

An Accounts Receivable (AR) manager is responsible for overseeing the entire accounts receivable management process to make sure businesses receive payments on time.

Their key duties include invoicing, payment tracking, managing collection strategies, reconciliation, reporting and analysis.

By effectively choosing and managing these processes, an AR manager helps maintain a steady cash flow, minimise bad debt, and strengthen customer relationships.

2. What are the five steps in managing accounts receivable?

1. Invoice customers promptly with clear payment terms.
2. Monitor payments and track overdue accounts.
3. Send reminders and follow up on late payments.
4. Use collections strategies when necessary.
5. Reconcile payments and maintain accurate financial records.