Are you managing your accounts receivable process well? AR billing connects your sales to your cash flow. When you deliver a product or service, AR billing ensures you get paid on time, keeping your business’s finances steady.
A good AR process is more than just sending invoices. It also includes tracking payments, following up on overdue balances, and staying organized. Without a clear system, mistakes or delays can hurt your cash flow and your profits.
In this blog, you’ll learn about the AR billing process, best practices for improving it, and how automation can make things easier. By the end, you’ll have the tools to optimize your AR process and keep cash flowing smoothly for your business.
Understanding Accounts Receivable (AR) Billing
Accounts receivable is the money your business is owed for products or services provided on credit. If you offer payment terms instead of asking for upfront payments or cash on delivery (COD), these unpaid balances must be recorded in your general ledger and balance sheet.
Efficient AR billing is key to keeping cash flow steady and ensuring your business’s financial health. AR automation can bring benefits such as better efficiency, improved security, and stronger management oversight.
Since AR is a current asset, it should turn into cash within a year. The faster you collect payments, the sooner you can reinvest that cash into growing your business or covering costs. For businesses with many transactions, like in finance, e-commerce, or SaaS, a structured AR process helps maintain liquidity and reduce financial risk.
The AR billing process includes a few key steps:
- Issuing invoices based on agreed payment terms and tracking them until they are paid.
- Following up on overdue payments to prevent delays and cash flow issues.
- Keeping your ERP system up to date with accurate, real-time financial data.
Managing AR manually can be slow and prone to errors, especially with frequent invoicing. Automating your AR billing process can reduce missed payments, minimize mistakes, and boost efficiency. With the right AR system, you’ll have clearer cash flow visibility, stronger vendor relationships, and a more scalable financial process to support your business’s growth.
Different AR Billing Documents and Their Functions
Accounts receivable involves creating invoices that list transaction details, such as items or services, prices, payment terms, and due dates. A well-organized AR billing process helps keep cash flow steady and reduces payment delays.
Types of AR billing documents
Finance teams use different billing documents depending on the transaction. Each document plays a specific role in managing receivables:
- Invoice: This is the main document used to request payment. It includes details of the goods or services provided, the total amount due, payment terms, and due dates. Invoices may be for full or partial payments based on the agreement.
- Credit memo: If one of your customers returns goods or gets a refund, a credit memo adjusts the original invoice. It reduces the amount owed and keeps financial records accurate.
- Debit memo: This document increases the amount a customer owes. It could be due to additional charges, like service fees or price changes. A debit memo updates an existing invoice without creating a new one.
- Chargeback: A chargeback happens when your customer disputes a transaction and asks for a refund through their credit card provider. If the dispute is valid, the business must return the money. In some cases, businesses issue chargebacks to fix mistakes in their invoices.
- Deposit invoice: When a business requires an upfront payment before delivering goods or services, it issues a deposit invoice. This secures part of the payment in advance and helps maintain financial stability.
- Guarantee invoice: Used when your customer agrees to repay a balance over time, this document ensures payments are made as scheduled. In high-risk situations, businesses may ask for collateral to protect against non-payment.
Why AR and Its Billing Matter for Your Business
Accounts Receivable is a key part of your company’s financial health. Managing AR billing well can improve your cash flow and overall performance. Here’s how it helps your business:
- Decrease company debt: Collecting AR on time lowers liabilities and frees up funds for other areas.
- Lower financing costs: Fast payments reduce the need for credit lines, saving on interest and improving profits.
- Improve cash flow: A steady flow of payments helps you reinvest in your business, whether for improvements or growth.
- Support business growth: Extra cash gives you the flexibility to invest in equipment, launch new products, or pay dividends to stakeholders.
By streamlining your AR billing, you can improve cash flow. This means you no longer have to chase new customers just to keep revenue steady. With efficient AR management, you can focus on growing your business and strengthening relationships with your vendors.
9 Steps in the Accounts Receivable Process
Accounts Receivable is crucial for businesses to improve collections, reduce delays, and build better relationships with customers. The process starts even before products or services are delivered and continues until payments are collected, recorded, and checked. Here’s a breakdown of each step in the AR process and tips on how to make it more efficient.
1. Receive and approve customer orders
The AR process begins when a customer places a purchase order (PO), indicating their intent to buy your products or services. Your team reviews and approves this order, turning it into a sales order (SO). This document acts as a contract between your business and the customer. It includes:
- Products or services provided
- Pricing and quantity
- Delivery details
- Payment terms and conditions
It’s important to assess the customer’s creditworthiness before finalizing the order. If they qualify, you can offer credit under specific terms. If they don’t meet your criteria, consider upfront payments, deposits, or shorter payment cycles. This step reduces the risk of non-payment and protects your business’s cash flow.
2. Set clear credit terms
A clear credit policy helps maintain consistency and prevent payment disputes. Your credit terms should include:
- Payment deadlines and accepted payment methods
- Credit limits and approval criteria
- Penalties for late payments or discounts for early payments
Before extending credit, evaluate a customer’s financial health, reputation, and payment history. If you offer terms like net 30, 60, or 90 days, make sure the customer understands the due dates and late fees. A transparent agreement reduces confusion and helps encourage timely payments.
For businesses with high transaction volumes, automating credit approvals can speed up the process and reduce manual effort.
3. Send accurate invoices promptly
Timely, accurate invoicing ensures that your customers know exactly how much they owe and when it’s due, reducing the chance of delays. Every invoice should include:
- A clear breakdown of charges
- Payment due date and the total amount owed
- Accepted payment methods
- Late fee policies (if applicable)
Delays in sending invoices can extend the collection cycle, which hurts cash flow. Using an automated invoicing system like Peakflo helps speed up the process and minimize mistakes. If an invoice needs adjustments, make the changes and resend it quickly to avoid payment delays.
With electronic invoicing, there’s no mailing delay, and you can track the status of invoices in real-time. You can also set up automatic notifications when an invoice is sent, opened, or paid.
4. Track and manage collections proactively
It’s important to actively monitor unpaid invoices to prevent overdue payments from stacking up. Use an AR aging report to track unpaid invoices and prioritize follow-ups based on their due dates.
A structured approach to collections will improve your chances of receiving payments:
- 0–7 days past due: Send a friendly reminder.
- 8–14 days past due: Send a second reminder.
- 15–30 days past due: Issue an official late payment notice and apply penalties if needed.
- 31–45 days past due: Send a final warning letter.
- 46–60 days past due: Increase the frequency of follow-ups.
- 61–90+ days past due: Escalate to senior management, legal teams, or a collection agency.
Automating payment reminders and follow-ups with Peakflo can help manage this process. Before escalating, double-check that invoices are correct, discounts were applied, and there are no billing errors. Keeping a professional tone throughout these follow-ups helps maintain good customer relationships.
5. Resolve invoice disputes quickly
Invoice disputes are a major cause of delayed payments, so resolving them quickly is essential. Common dispute causes include:
- Incorrect billing details
- Service-related issues
- Misunderstandings about pricing or contracts
If a customer partially pays an invoice (short payment), the AR team must identify the reason and adjust records accordingly. Having detailed documentation of agreements, proposals, and communication can help resolve disputes faster.
You can also set up a dispute resolution workflow in your AR system to assign issues to the right team and track progress.
6. Offer convenient payment options
Complicated payment processes are one of the most common reasons for late payments. The easier you make it for customers to pay, the faster you’ll get your money.
To improve payment speed, offer:
- Multiple payment methods (ACH, wire transfer, credit card, virtual card)
- Direct payment links on invoices
- A self-service portal for invoice tracking and payments
Many businesses still rely on paper checks, which slow down the process. Encouraging digital payments speeds up payments and reduces delays. For customers with recurring payments, consider setting up auto-pay to ensure payments are made on time without extra effort.
7. Reconcile and apply payments accurately
Once payments are received, they must be matched to the correct invoice and recorded in the AR ledger. This step is known as cash application, and it can be tricky because:
- Payments may arrive without remittance details
- Remittance advice may come separately from payments
- Payment details might not match open invoices
Automating this step minimizes errors and speeds up reconciliation. If any details are missing, the AR team should contact the customer right away for clarification.
8. Write off uncollectible debt
Some invoices just can’t be collected. If repeated efforts fail, these unpaid invoices may need to be written off as bad debts. Businesses should establish clear guidelines on:
- When an invoice should be considered uncollectible
- When to get legal help or hire a collection agency
- How to record bad debt in financial reports
Having an allowance for doubtful accounts ensures that your financial statements show realistic expectations. Reviewing past write-offs can help adjust your credit policies to avoid future bad debts.
9. Monitor AR performance with key metrics
Tracking AR performance helps businesses improve cash flow management and optimize collections. Key metrics include:
- Days sales outstanding (DSO): Measures how fast payments are collected.
- Collection effectiveness index (CEI): Tracks the percentage of invoices collected successfully.
- AR turnover ratio: Reflects how efficiently invoices turn into cash.
- Average days delinquent (ADD): Identifies trends in overdue payments.
Regular AR reporting lets you spot potential problems early and refine your approach. A study by PYMNTS shows that 91% of mid-sized firms with fully automated AR systems report higher savings, better cash flow, and growth. Real-time AR dashboards help finance teams monitor outstanding balances, payment trends, and collection effectiveness.
A well-structured AR process helps businesses collect payments faster, reduce manual work, and maintain strong customer relationships. By automating key tasks, setting clear credit policies, and tracking AR performance, you can improve cash flow and reduce overdue invoices.
Key Accounts Receivable Formulas to Measure AR Billing Health
To enhance your accounts receivable process, it’s important to have effective strategies and measurable outcomes. By monitoring key AR formulas, you can evaluate how efficiently you collect payments, identify challenges, and make informed decisions. These metrics play a vital role in improving cash flow, speeding up revenue cycles, and ensuring your financial operations stay on track.
By assessing the health of your AR billing, you can fine-tune collection strategies, optimize cash flow, and pinpoint areas for improvement. Below are some key AR formulas and metrics that will help you evaluate your performance and achieve stronger financial outcomes.
Average accounts receivable
This metric calculates the average amount of unpaid payments your business is owed over a set period. Financial reports typically show Accounts Receivable at a single point in time. However, this formula provides a better understanding of how receivables fluctuate during the reporting period.
Formula:
Average Accounts Receivable = (Beginning AR + Ending AR) ÷ 2
Though you may not rely on this number alone, it plays a key role in calculating more complex AR performance indicators, such as accounts receivable turnover.
Accounts receivable turnover ratio
This metric also called the debtor’s turnover ratio, shows how often your business collects an amount equal to its average accounts receivable balance in a specific period, usually one year. A higher ratio means your collection process is working well, while a lower ratio may point to delays in getting payments.
Formula:
Accounts Receivable Turnover = Net Credit Sales ÷ Average Accounts Receivable
Monitoring this ratio helps you determine whether your credit and AR billing policies are effective or need adjustment.
Additional AR metrics to track
Beyond these core formulas, several other KPIs provide deeper insights into AR efficiency:
- Average Collection Period: The average number of days it takes to collect payments.
Formula: Average Collection Period = (Average Accounts Receivable / Net Credit Sales) x 365 days. - Average Delinquent Days (ADD): Measures the extent of overdue payments.
Formula: ADD = Days Sales Outstanding – Best Possible Days Sales Outstanding - Bad Debt to Sales Ratio: The percentage of total sales lost due to unpaid invoices.
Formula: Bad debt to sales ratio = bad debt / total sales - Operation Collection Per Cost: The expenses incurred in recovering outstanding payments.
Formula: Cost Per Collection = A/R-Related Expenses / no. of Completed Collections - Collection Effectiveness Index (CEI): A measure of how successful your AR team is in collecting outstanding receivables.
Formula: CEI = (Beginning AR Balance + Credit Sales during Period) – Ending Total AR Balance / (Beginning AR Balance + Credit Sales during Period) – Ending Total Current Balance x 100 - Days Sales Outstanding (DSO): The average time it takes to convert credit sales into cash.
Formula: DSO = (Accounts Receivable / Net Credit Sales) x Number of days - Number of Revised Invoices: Tracks how often invoices are modified due to errors or disputes.
Formula: To track revised invoices, instead of using a formula, consider the following factors:
- Average time spent resolving disputes (including work hours and the number of revised invoices generated due to disputes)
- Average time spent creating revised invoices
- Average delivery time for revised invoices (if using traditional mail or other non-instant communication methods)
Sum these times to get a cumulative total. Then, add this value to your average collection period to estimate when payment will be received after reissuing an invoice.
- Right Party Contact (RPC) Rate: Measures the success rate of reaching the correct customer for payment resolution.
Formula: RPC Rate (%) = (Number of successful RPCs / Total Calls Dialled) x 100
By regularly evaluating these metrics, you can easily identify inefficiencies and improve your AR billing processes.
5 Best Practices for an Efficient AR Billing System
Optimizing accounts receivable helps businesses get paid faster and manage cash flow. Some methods might be costly or hard for small businesses to use. However, some tools and practices make AR billing easier. Here are some effective ways to improve your AR process.
1. Encourage cross-department collaboration
Unpaid invoices often require help from many departments. Customer service teams can help with billing disputes or unresolved complaints. Sales teams may mention special agreements made with customers that affect payment schedules. Even small mistakes or technical issues in invoices can delay payments. Regular communication between teams helps resolve issues faster and prevent delays.
2. Implement an automated payment communication system
An automated payment system reduces manual work and improves collection rates. The right system allows you to:
- Automatically create and send invoices.
- Offer multiple payment options.
- Let customers make payments through a self-service portal.
3. Offer recurring payment plans
Businesses with high-value services or products can benefit from offering installment-based payments. It makes payments easier and lowers the chances of missed payments. An automated system should:
- Let customers set up payment schedules online.
- Withdraw payments automatically without manual help.
- Offer flexibility for customers who want to pay in installments.
4. Enable self-service payment options
Not all customers want to talk to a representative to make payments. Online payment portals and IVR (Interactive Voice Response) phone systems offer:
- Secure, 24/7 payment access.
- Convenience for customers who want to handle payments on their own.
- Fewer late payments because customers can pay anytime.
5. Use detailed reports for smarter decisions
Good reporting tools provide useful insights into payment trends and overdue accounts. Look for systems that include:
- Customizable reports to track AR performance.
- Reports for specific departments.
- Tracking for payments by employees.
Clear reports help finance teams make better decisions, reduce outstanding balances, and improve collections.
By following these practices, businesses can improve AR billing efficiency, reduce costs, and provide better customer experiences.
5 Common Challenges in Managing AR Billing
Handling AR billing manually can slow down cash flow and create extra work for finance teams. Each step, from creating invoices to processing payments, takes time. Without automation, it gets harder to manage finances. This can lead to frustration for both your team and your customers. Here are some common challenges you might face:
1. Manual AR billing and delivery
If you’re still mailing invoices, you waste time printing and mailing them. Even sending invoices by email requires manual effort to send or upload them to customer portals. These steps delay payments, make tracking harder, and confuse customers about what they owe.
To fix this, using a finance CRM like Peakflo can help. It lets finance teams manage customer relationships by centralizing communication, automating follow-ups, and showing a clear view of all customer interactions. This speeds up collections and improves cash flow management.
2. Unstructured collections process
Without automation, collections become a cycle of emails and phone calls. If your team is busy, they may focus only on large unpaid amounts, ignoring smaller invoices. This inconsistency slows revenue and hurts cash flow.
3. Disconnected payment processing systems
Online payments require different parts, like payment processors and e-commerce platforms. If you use different systems for each, it can cause delays. Without a central system, your AR team has to process payments manually. This leads to slower transactions and increases the risk of errors and compliance issues.
4. Time-consuming cash application
Digital payments are growing, but some customers still send checks in different formats. Since there’s no standard format, your team has to match payments to invoices manually. This takes time, increases the chance of mistakes, and slows down the reconciliation process.
5. Constant back-and-forth with customers
AR billing isn’t just about sending invoices. It requires communication when customers have disputes or missing payment details. Without a central system, these conversations get lost in email threads, causing delays and frustration for both sides.
In Singapore, the Monetary Authority of Singapore (MAS) has announced plans to phase out corporate cheques by the end of 2025. They encourage businesses to adopt electronic payments for better efficiency.
Automating AR billing eliminates inefficiencies, speeds up collections, and improves cash flow. A streamlined process reduces manual work, improves accuracy, and gives customers a better experience.
Next, we’ll see how Peakflo’s automation can help solve these AR billing challenges.
How Peakflo’s AR Automation Transforms Productivity
Manual AR billing and collections can slow down your financial processes. They also lead to more mistakes and reduce efficiency. Peakflo automates these tasks, making it easier to manage your finances. This improvement helps boost cash flow, reduce manual work, and keep operations running smoothly. Here’s how automation can transform your AR management:
1. Reduce your manual workload with automated AR billing
Manual invoicing and collections can be time-consuming and lead to tracking problems. With Peakflo, you can automate the invoicing and collection process. It helps you keep track of outstanding invoices and customer AP portals all in one place. The AI-driven system prioritizes high-value invoices so they get the attention they need right away.
Meanwhile, automation handles repetitive tasks, like follow-ups and call transcriptions, saving you time and effort.
2. Streamline your proforma invoice validation process
Peakflo simplifies proforma invoice validation with automated features for accuracy and efficiency. Create branded proforma invoices with customized line items, discounts, and tax rates for easy client validation. Share invoices through the customer portal, where your clients can review, approve, or dispute specific line items with customizable reasons.
Track and resolve disputes in the invoice timeline with instant stakeholder notifications. Your clients can accept invoices with one click while your accounts receivable team monitors the validation status in real-time.
3. Speed up your cash application with automated reconciliation
Manually matching payments to invoices can be slow and lead to mistakes. Peakflo connects with your ERP system to automate the reconciliation process. This reduces the need for manual data entry and ensures that payment tracking is precise. As a result, your team saves time in month-end closing and can focus on more important tasks while improving financial accuracy.
4. Improve your collections with AI-driven predictions
Waiting for payments to be overdue can hurt your cash flow. Peakflo’s AI-powered cash flow insights predict which invoices might be late. This lets your team take action early. The system helps prioritize collections by risk so you can recover payments faster and maintain steady revenue.
Whether you’re managing cash flow for an enterprise, SaaS company, or accounting firm, Peakflo equips you with the tools to streamline operations and optimize liquidity with confidence.
Conclusion
Optimizing your accounts receivable process is crucial for keeping a steady cash flow and avoiding payment delays. By using best practices and automation tools, you can make invoicing more efficient, improve the accuracy of collections, and reduce mistakes. A well-organized AR system ensures that payments are made on time, strengthens relationships with customers, and helps maintain financial stability over the long term.
To explore how Peakflo’s solutions can be tailored to help your AR billing needs, contact the team today for a demo or take the product tour to get a more personalized consultation for your business.
