Standard Operating Procedure: Accounts Receivable (AR) Workflow

This Standard Operating Procedure (SOP) outlines the standardized process for managing the Accounts Receivable lifecycle, from initial invoice generation to final payment reconciliation. The objective of this procedure is to ensure accurate financial reporting, minimize Days Sales Outstanding (DSO), improve organizational cash flow, and maintain positive client relationships through professional, consistent communication. All personnel involved in the billing cycle must adhere to these steps to ensure compliance with internal accounting controls and organizational standards.

Section 1: Invoicing and Documentation

• Verify Service/Product Delivery: Confirm that the goods were shipped or services were completed and approved by the project manager or relevant department head.
• Generate Invoice: Create the invoice within the accounting software (e.g., QuickBooks, NetSuite, Xero), ensuring the client’s PO number, correct billing address, and itemized descriptions are accurate.
• Internal Review: Perform a quality control check for tax calculations, discount applications, and payment terms before finalizing.
• Dispatch Invoice: Send the final invoice to the designated client contact via the established delivery method (usually secure email or client portal) and log the send date in the system.

Section 2: Payment Posting and Reconciliation

• Receipt Tracking: Monitor bank feeds and lockbox reports daily for incoming payments.
• Application of Funds: Apply incoming payments to the specific invoices identified by the client. If no reference is provided, apply the payment to the oldest outstanding invoice.
• Discrepancy Investigation: Immediately flag any partial payments or overpayments. Contact the client for clarification if payment does not match the invoice amount.
• Reconciliation: Perform daily bank reconciliations to ensure the ledger matches the cash received, maintaining audit-ready documentation for every transaction.

Section 3: Collections and Account Aging

• Monitor Aging Reports: Run an Aged Receivables report every Monday morning to identify overdue accounts.
• Proactive Reminder: Send a polite "reminder" email 3–5 days before the due date to ensure the invoice has been received.
• Escalation Protocol:
  • 1–15 days overdue: Send a friendly automated reminder email with the invoice attached.
  • 16–30 days overdue: Perform a personal follow-up call to verify receipt and check for any internal processing delays.
  • 31+ days overdue: Issue a formal demand letter and notify the account manager to place a temporary hold on further services/shipments.
• Bad Debt Documentation: If an account remains unpaid beyond 90 days, prepare the necessary documentation for write-off approval or submission to a third-party collection agency.

Pro Tips & Pitfalls

• Pro Tip: Automate your invoicing workflow. Using recurring invoice templates for retainer clients reduces manual labor and minimizes human error.
• Pro Tip: Provide multiple payment options (ACH, credit card, portal links) to remove friction and accelerate the time-to-payment.
• Pitfall: Poor Communication: Do not let overdue invoices "sit" without contact. The longer an invoice is ignored, the lower the probability of collection.
• Pitfall: Lack of Dispute Resolution: Always have a process to log client disputes immediately. If a client disputes an invoice, pause collection efforts, investigate the claim, and issue a credit memo if necessary to maintain goodwill.

Frequently Asked Questions (FAQ)

1. What should I do if a client claims they never received an invoice? Verify the email address on file, re-send the invoice immediately, and confirm receipt via a phone call or read-receipt. Log the incident in the system notes to see if it becomes a recurring pattern.

2. How should we handle partial payments? Accept the partial payment, update the AR aging report to show the remaining balance, and contact the client to obtain a written schedule for the remainder of the balance.

3. When is it appropriate to stop services for a client? Services should generally be paused once an account hits the 45-day overdue mark, or sooner if internal policy dictates. Always involve the Account Manager before pausing services to ensure they are aware of the potential impact on the client relationship.

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