Accounts receivable collections: a step-by-step process for small teams

Accounts receivable is the money customers owe you for work already invoiced. Collections is everything you do to get it paid. In the UK the same function is usually called credit control.

This guide is about the process as a whole: the steps, who does them and how often. If you have one overdue invoice in front of you right now, start with our guide to collecting unpaid invoices, which works through a single invoice from first check to last resort.

1. Set up the customer before the work starts

Collections starts at the quote. Before you begin work for a new customer, agree and record:

• The payment terms, in writing, and the due date they produce. Our guide to Net 30 payment terms covers how to word them.
• Who receives invoices, and their email address. This is often an accounts payable mailbox, not the person who hired you.
• Whether the customer needs a PO number, a supplier number or a particular invoice format.
• For larger accounts, enough about the business to decide how much credit to give. A credit application form collects it in one go.

Most of the blockers that delay payment later, such as a missing PO or the wrong contact, are cheaper to fix here than after the due date.

2. Invoice correctly and on time

Send the invoice as soon as the work or milestone is done, to the right address, with the PO, the agreed terms and the actual due date on it. An invoice sent two weeks late starts its payment clock two weeks late. Our guide to invoice terms and conditions has a terms block you can copy.

3. Confirm the invoice arrived

For larger invoices or new customers, check within a few days that the invoice reached the right person and nothing is missing. One short email catches problems while there is time to fix them.

4. Remind and follow up on a fixed schedule

Decide the schedule once and apply it to every customer: a reminder shortly before the due date, a follow-up the day after, then follow-ups at set intervals, each one asking for something specific. The collections email sequence sets out a full schedule with wording for each step.

5. Work the replies

This is where most of the effort goes, and where most processes fall apart. Every reply needs the right next action:

A dispute should stop the normal reminders until it is resolved. Our guide to invoice disputes covers how to handle one, and the payment plan agreement guide has a template for when the customer needs time.

6. Escalate by rule, not by mood

Decide in advance what triggers an escalation, so it does not depend on anyone's mood that day. For example: escalate to the business owner when a customer misses two promised dates, or an invoice passes 45 days overdue. Escalation might mean a firmer letter, contact with someone more senior at the customer, or pausing further work.

7. Close out every invoice

An invoice leaves the process in one of four ways: paid in full, settled under an agreed plan, credited because the customer was right, or written off. Apply payments and credits promptly so the aging report stays true. For invoices that will not be paid, decide on purpose: pass the debt to an outside party, or write it off. Our resource pages on bad debt expense and the allowance for doubtful accounts explain how that is recorded.

Most small businesses have no full-time credit controller. That is fine, as long as every step has a name against it. A common split:

The single most useful decision is naming one collections owner. When two people each assume the other sent the follow-up, nobody did.

The process runs on a weekly review. Pick a day and a time, such as Tuesday morning, and keep it. Work from the accounts receivable aging report:

Weekly collections review - [Date]

1. Run the aging report as of today.
2. Promises due this week: which were kept, which were missed?
   Follow up every missed one today.
3. New overdue invoices since last week: has each had its first
   follow-up?
4. Blockers: any invoice waiting on a PO, a contact or a query?
   Who is fixing it, and by when?
5. Disputes: any open longer than [Number] days? Escalate.
6. Escalations: any account that meets the escalation rules?
   Decide the next step and who takes it.
7. Over 90 days: chase, plan, hand over or write off. Decide.
8. Note anything that keeps happening with one customer, and fix
   it at setup next time.

The last item is how the process improves. If three invoices were late for the same reason, the fix belongs in step 1 or 2, not another reminder.

A collections policy puts the process on one page. It tells everyone in the business, and anyone covering a holiday, what happens and when. Adjust the days and amounts to suit your customers and terms.

[Business name] collections policy
Last reviewed: [Date]

Payment terms
Our standard terms are [Net 30 / Your terms] from the invoice date.
Different terms need approval from [Name or role].

Before work starts
We record the billing contact, any PO or supplier number, and the
agreed terms for every new customer. Accounts over [Amount] complete
a credit application.

Invoicing
Invoices go out within [Number] working days of the work or milestone,
to the billing contact, with the due date and any PO shown.

Follow-up schedule
- [Number] days before due: reminder
- 1 day after due: first follow-up, asking for a payment date
- Every [Number] days after that: follow-up asking for a specific action
- [Number] days overdue: final notice

Promises and plans
Every payment date a customer gives is recorded and followed up the
day after if unpaid. Payment plans are agreed in writing by
[Name or role].

Disputes
Chasing stops on a disputed invoice until [Name or role] resolves it.
The customer is told who is handling it and by when.

Escalation
[Name or role] is told when a customer misses two promised dates, an
invoice is over [Number] days overdue, or an account owes more than
[Amount] overdue.

Close-out
Write-offs and referrals to outside parties are approved by
[Name or role].

Owner of this policy: [Name or role]

Review it every few months, or when something has gone wrong twice.

Four measures tell you more than the total owed:

• Overdue balance and its age. Is money moving into older aging buckets, or out of them?
• Promises kept. Of the payment dates customers gave you this month, how many were met? A low rate means you are accepting vague dates.
• Time to resolve blockers. How long does an invoice wait for a PO or a corrected contact?
• Days sales outstanding. Our guide to DSO explains how to calculate it and what moves it.