Standard Operating Procedure: Accounts Receivable (AR) Management

The Accounts Receivable process is a critical component of organizational financial health, ensuring the timely conversion of services and goods into cash flow. This Standard Operating Procedure (SOP) outlines the lifecycle of AR, from initial invoicing to final reconciliation. Adherence to these protocols minimizes Days Sales Outstanding (DSO), mitigates credit risk, and ensures accurate financial reporting. All personnel involved in the billing cycle must follow these steps to maintain internal controls and audit readiness.

1. Customer Credit and Onboarding

Before services are rendered, verify the financial stability of the client to mitigate bad debt risks.

• Perform a credit check for all new B2B clients using authorized credit reporting agencies.
• Establish and document credit limits and payment terms (e.g., Net 30, Net 60) in the ERP/Accounting system.
• Secure a signed Master Service Agreement (MSA) and a completed Credit Application form.
• Create the customer profile in the accounting system with accurate tax information, billing address, and contact details for the Accounts Payable department.

2. Invoicing and Billing Accuracy

Invoices must be accurate, timely, and compliant with contractual obligations to ensure prompt payment.

• Verify delivery of goods or services against purchase orders (POs) or contract milestones.
• Generate invoices immediately following the completion of the billing trigger.
• Ensure every invoice includes: a unique invoice number, date, clear description of services/goods, payment terms, and remittance instructions.
• Perform a secondary review of high-value invoices to ensure pricing matches current contracts.
• Email invoices to the designated client contact and maintain a delivery receipt log.

3. Payment Posting and Reconciliation

Efficient posting prevents customer disputes and provides visibility into real-time cash positions.

• Daily review of bank feeds or lockbox reports to identify incoming payments.
• Apply payments in the accounting system by matching the payment amount and check/transaction number to the specific invoice.
• Record overpayments or short payments immediately for investigation.
• Issue receipts or automated payment confirmations to the client upon successful posting.
• Perform weekly bank reconciliations to ensure the AR sub-ledger matches the General Ledger (GL).

4. Collections and Escalation

Proactive communication is essential for managing delinquent accounts without damaging business relationships.

• Run an Aging Report every Monday morning to identify invoices approaching their due date.
• Send an automated "Friendly Reminder" 3 days before the due date.
• If an invoice is 1–15 days past due: Send a formal email inquiry to the client contact.
• If an invoice is 30+ days past due: Initiate a phone call to the client’s AP department.
• If an invoice is 60+ days past due: Escalate to Sales or Account Management to leverage the relationship and place the account on a "Credit Hold" status.

Pro Tips & Pitfalls

• Pro Tip: Electronic Payments. Incentivize clients to switch from checks to ACH or Credit Card payments to reduce mail time and manual processing effort.
• Pro Tip: Dedicated Email. Create a dedicated billing@company.com email address to ensure invoices do not get lost in personal employee inboxes.
• Pitfall: Poor Communication. Avoid waiting until an invoice is 90 days late to communicate with the client. Early communication often resolves "lost invoice" issues.
• Pitfall: Lack of Documentation. Failing to document every collection attempt can lead to legal complications if an account must be sent to a collection agency. Always keep a log of calls and emails.

Frequently Asked Questions (FAQ)

Q: What should I do if a client disputes an invoice? A: Immediately place the specific invoice in "Disputed" status in your system to stop automatic late fees. Request documentation from the client regarding the discrepancy and notify the internal project owner to resolve the billing error within 48 hours.

Q: How often should the Aging Report be reviewed? A: At a minimum, the AR Aging Report should be reviewed weekly. For organizations with high transaction volumes, a daily review of the "Over 30 Days" column is recommended.

Q: When should an account be written off as Bad Debt? A: An account should be considered for write-off only after all collection attempts—including formal demand letters and external collection agency intervention—have been exhausted. This action requires approval from the Controller or CFO based on the company’s specific Bad Debt Reserve policy.