Managing accounts receivable (AR) is crucial for a business’s financial health. Late payments, outstanding invoices, and cash flow issues can harm business operations and lead to financial instability. An efficient AR process ensures that payments are collected on time, reduces financial risks, and strengthens customer relationships. Without proper AR management, businesses may struggle to meet operational costs, pay employees, or invest in growth. This guide explains what accounts receivable is, why it is important, and how you can improve accounts receivable with ten practical and effective strategies.
What Are Accounts Receivable?
Accounts receivable refers to the money a business is owed by its customers for goods or services delivered but not yet paid for. It is considered a short-term asset on a company’s balance sheet. Businesses that offer credit to customers allow them to pay later, typically within 30, 60, or 90 days. Managing AR properly ensures that companies maintain steady cash flow and avoid financial strain. If AR is not handled well, businesses may experience delayed payments, disputes, and bad debts, which can negatively impact overall financial performance and growth.
Why Are Accounts Receivable Important?
Well-managed accounts receivable ensure steady cash flow, financial stability, and business sustainability. When payments are collected on time, companies can reinvest in operations, pay suppliers, and plan for future growth. A strong AR process helps businesses:
- Maintain a healthy working capital and liquidity
- Reduce bad debts and minimize financial risks
- Strengthen long-term customer relationships
- Improve financial forecasting and budgeting accuracy
- Increase overall profitability and business efficiency
If AR is not managed effectively, businesses may struggle with operational expenses, face difficulties in scaling, and risk financial losses due to unpaid invoices. Strong AR management leads to a more predictable and sustainable revenue stream.
Also Read: What is Down Coding in Medical Billing
10 Best Ways to Improve Accounts Receivable Process
1. Set Clear Payment Terms
Ensure that your payment terms are simple, transparent, and easy to understand. Define the due dates, penalties for late payments, and the available payment methods clearly in contracts and invoices. Offering early payment incentives, such as small discounts, can encourage customers to pay before the deadline. Additionally, clearly stating late fees or interest charges for overdue payments can discourage late payments and improve collection rates. When customers fully understand their obligations, they are more likely to pay on time.
2. Use Automated Billing Systems
Manual invoicing is prone to human errors and delays, which can slow down payments and cause discrepancies. Implementing an automated billing system helps generate accurate invoices, send timely reminders, and track outstanding payments efficiently. Automation ensures that invoices are sent immediately after a service is provided, reducing the risk of forgotten payments. It also allows businesses to monitor payment status in real time and quickly follow up on overdue accounts. Investing in a reliable AR automation tool can save time, reduce errors, and improve cash flow.
3. Verify Patient Insurance and Coverage
For medical accounts receivable, verifying a patient’s insurance details before providing services helps prevent claim denials and payment delays. Always confirm insurance eligibility, coverage limits, deductibles, and co-payment responsibilities upfront to avoid billing surprises later. Many claims are denied due to incorrect or outdated insurance information, leading to increased AR balances. By conducting insurance verification before treatment, medical providers can reduce billing errors and ensure smoother collections from insurance companies and patients.
Helpful for you: Patient Eligibility Verification
4. Send Timely and Consistent Invoice Reminders
Late payments often happen simply because customers forget their due dates. Sending timely invoice reminders through multiple channels, such as emails, SMS, or phone calls, helps keep payments top of mind. A structured follow-up system ensures that customers receive reminders before and after the due date. Consider setting automated reminders at intervals (e.g., 7 days before due, on the due date, and 3 days after). Consistent follow-ups improve payment rates and reduce the number of overdue invoices.
5. Offer Multiple Payment Options
Customers are more likely to pay on time when they have convenient and flexible payment options. Offer multiple methods such as credit cards, direct bank transfers, mobile wallets, and online payment gateways. Some customers prefer traditional checks, while others prefer digital options like PayPal or Apple Pay. Providing a variety of payment methods makes it easier for customers to complete transactions, reducing delays and improving collection rates. The easier it is for clients to pay, the faster your AR will be collected.
6. Implement a Strict Credit Policy
Extending credit to customers can increase sales, but it also comes with risks. Establish a strict credit policy that assesses customer creditworthiness before approving credit terms. Conduct background checks, review financial stability, and set appropriate credit limits based on the customer’s payment history. Businesses can also implement shorter payment terms (e.g., 15 days instead of 30) for new or high-risk clients to reduce financial exposure. A strong credit policy minimizes late payments and bad debts. According to the Federal Reserve, monitoring credit risk and setting clear policies can significantly reduce financial losses
Helpful for you: Medical Billing Compliance
7. Train Staff on AR Best Practices
Your finance and accounts receivable team should be well-trained in AR management, collections, and customer communication. Provide ongoing training on best practices, including effective invoicing techniques, negotiation skills, and dispute resolution strategies. A well-trained team can identify potential collection issues early, handle payment delays professionally, and improve overall efficiency. Strong AR management requires clear processes and knowledgeable employees who can ensure timely payments.
8. Monitor AR Aging Reports
An accounts receivable aging report categorizes outstanding invoices based on how long they have been unpaid (e.g., 30, 60, or 90+ days). Regularly reviewing aging reports helps businesses identify overdue accounts and take prompt action. Businesses should set up a process where older invoices receive higher priority for collection efforts. Identifying trends in late payments can also help refine credit policies and improve cash flow management. Keeping a close eye on AR reports prevents invoices from turning into bad debts.
9. Establish a Strong Collections Strategy
A structured collections strategy helps businesses recover overdue payments effectively. Start with friendly reminders and escalate to firm collection notices if needed. If a customer repeatedly misses payments, consider negotiating a payment plan instead of letting the debt go unpaid. As a last resort, legal action or debt collection agencies may be necessary. Having a step-by-step process ensures that overdue payments are handled systematically without damaging customer relationships.
10. Outsource AR Management if Needed
If managing accounts receivable internally is becoming overwhelming, outsourcing to a professional medical billing company can be a smart decision. Experts can streamline collections, reduce outstanding balances, and ensure compliance with financial regulations. Outsourcing allows businesses to focus on core operations while professionals handle invoicing, follow-ups, and collections. While it comes at a cost, the benefits of improved cash flow and reduced bad debts often outweigh the expenses.
Should You Outsource AR Management?
Outsourcing AR management can help businesses struggling with collection delays, limited resources, or complex billing processes. It provides access to specialists who use advanced tracking tools and proven strategies to ensure faster payments.
Pros of Outsourcing AR Management:
- Improved cash flow and reduced overdue payments
- Less administrative burden on in-house teams
- Advanced tools for tracking and managing payments
- Lower risk of bad debts through professional handling
Cons of Outsourcing AR Management:
- Additional costs for hiring external AR specialists
- Less direct control over customer interactions
Conclusion
Efficient accounts receivable management is essential for maintaining financial stability, improving cash flow, and reducing bad debts. By implementing clear payment terms, using automation, verifying insurance, and having a structured collections process, businesses can improve their AR efficiency. If managing AR becomes challenging, outsourcing can be a beneficial solution. A strong AR strategy ensures that businesses get paid on time, remain financially healthy, and continue growing.
FAQs
What are the 5 strategies for effective accounts receivable management?
- Clear payment terms and conditions
- Automated invoicing and reminders
- Strong credit approval processes
- Regular AR aging report reviews
- A well-defined collections strategy
What is the 10 rule for accounts receivable?
The 10% rule suggests businesses should keep accounts receivable below 10% of their total revenue to maintain healthy cash flow.
What makes accounts receivable increase?
AR increases when businesses extend more credit, delay invoicing, or have slow-paying customers. Poor collection strategies and relaxed payment terms can also contribute.
