Accounts Receivable: A Complete Guide for Small Business

What Is Accounts Receivable?

Accounts receivable (AR) represents money that customers owe your business for goods or services you have delivered but they have not yet paid for. When you send an invoice with 30-day payment terms, the amount becomes an accounts receivable entry until the customer pays.

AR is classified as a current asset on your balance sheet because you expect to receive the money within 12 months. For many businesses, it represents a significant portion of their total assets.

Why Accounts Receivable Management Matters

Poor AR management is one of the top reasons small businesses experience cash flow problems. You might have a full order book and healthy profit margins, but if your clients are not paying on time, you do not have the cash to cover your own expenses.

Consider this scenario: you have $50,000 in outstanding invoices, but your rent, wages, and suppliers need $30,000 this week. On paper, you are profitable. In reality, you cannot pay your bills.

Effective AR management means getting paid faster, reducing bad debts, and maintaining the cash flow your business needs to operate.

Setting Up Accounts Receivable

Define Your Payment Terms

Before you send your first invoice, decide on your payment terms. Common options include:

• Due on receipt - Payment expected immediately
• Net 7 - Payment due within 7 days
• Net 14 - Payment due within 14 days
• Net 30 - Payment due within 30 days (the most common)
• Net 60 - Payment due within 60 days (common for larger clients)

Shorter payment terms improve your cash flow but may not be practical for all industries or client relationships. Choose terms that balance cash flow needs with market expectations.

Create Professional Invoices

Your invoices should include:

• Your business name, ABN/ACN, and contact details
• The client's name and address
• A unique invoice number
• The date of issue
• A clear description of goods or services provided
• The amount due, including GST breakdown
• Your payment terms
• Your bank details or payment options
• Any applicable purchase order number

Set Up Payment Options

Make it easy for clients to pay. Offer multiple payment methods:

• Bank transfer (include your BSB and account number)
• Credit card payments through your invoicing software
• Direct debit for recurring payments
• Online payment portals

The easier you make it to pay, the faster you get paid.

Managing Accounts Receivable Day to Day

Track Every Invoice

Use your accounting software to track all outstanding invoices. Xero and similar platforms provide an accounts receivable report that shows:

• Total amount outstanding
• How much is current (within terms)
• How much is overdue and by how many days
• Individual invoice details

Review this report weekly to stay on top of what is owed.

Follow Up Promptly

Do not wait until an invoice is 60 days overdue to follow up. Have a systematic approach:

Day 1 - Send the invoice immediately when work is completed or goods are delivered.

Day 7 before due - Send a friendly reminder that payment is coming due.

Day 1 overdue - Send a polite reminder noting the invoice is now past due.

Day 14 overdue - Follow up with a phone call or more direct email.

Day 30 overdue - Send a formal demand letter and consider putting the account on hold.

Day 60+ overdue - Consider engaging a debt collection service or writing off the debt.

Offer Early Payment Incentives

Some businesses offer a small discount for early payment. For example, "2/10 Net 30" means the client gets a 2% discount if they pay within 10 days, otherwise the full amount is due in 30 days. This can significantly accelerate payments.

Charge Late Payment Fees

Include a late payment clause in your terms of trade. Even if you rarely enforce it, the existence of a late fee encourages timely payment. In Australia, you can charge reasonable interest on overdue amounts if your terms specify this.

Key Metrics to Monitor

Days Sales Outstanding (DSO)

DSO measures the average number of days it takes to collect payment after a sale. Calculate it by dividing accounts receivable by total credit sales, then multiplying by the number of days in the period.

A lower DSO means you are collecting payments faster. If your terms are Net 30 and your DSO is 45, clients are taking 50% longer than agreed to pay.

AR Aging Report

The aging report breaks down your receivables by how long they have been outstanding:

• Current (within terms)
• 1-30 days overdue
• 31-60 days overdue
• 61-90 days overdue
• 90+ days overdue

The older an invoice gets, the less likely it is to be collected. Industry data suggests that invoices over 90 days old have a collection rate of only about 70%.

Automating Accounts Receivable

Accounting software automates many AR tasks:

• Auto-generated invoices for recurring services
• Automatic payment reminders at intervals you define
• Online payment links embedded in invoices
• Real-time AR reporting and aging analysis
• Payment matching when funds arrive

Tools like SortBooks complement your accounting software by automatically matching incoming payments to outstanding invoices, reducing manual reconciliation work and ensuring your AR records are always current.

Tips for Better AR Management

1. Invoice immediately - do not wait until end of month
2. Be crystal clear about payment terms from the start
3. Make paying easy with multiple payment options
4. Follow up consistently and systematically
5. Know your clients - some always pay late, so factor that into your planning
6. Consider deposits or progress payments for large projects
7. Review your AR aging report weekly
8. Write off genuinely uncollectable debts rather than letting them sit on your books indefinitely

Accounts receivable management is not just about bookkeeping - it is about cash flow survival. The businesses that manage their receivables well are the ones that have the cash to invest, grow, and weather tough times.