Taking care of accounts receivable (AR) is important for keeping a business's cash flow strong. Many business owners often make mistakes that can result in late payments, unpaid debts, and money problems. If you're often getting late payments, having trouble collecting bills, or noticing issues in your accounts receivable reports, many others are facing the same problems.
This article will walk you through the five most common AR mistakes and provide AR best practices to help you improve collections, maintain positive cash flow, and optimize your small business accounting processes.
1. Not Having Clear Payment Terms
One major mistake companies make with accounts receivable is not setting clear payment terms with their customers. If your invoices don’t specify due dates, late fees, or payment methods, clients may delay payments or ignore invoices altogether.
How to Fix It:
Clearly state payment terms (e.g., “Net 15” or “Net 30”) on every invoice.
Outline penalties for late payments, such as a 1.5% late fee per month.
Offer multiple payment options (ACH, credit card, digital wallets) to make it easier for clients to pay.
Set expectations upfront in contracts and agreements.
Automate your invoicing process using AR automation tools to ensure invoices go out on time with predefined payment terms.
2. Sending Out Late or Incomplete Invoices
Delayed or incorrect invoicing is a major cause of late invoice payments. If your clients receive an invoice weeks after services were provided—or if your invoice lacks essential details—payment delays are inevitable.
How to Fix It:
Send invoices immediately after completing a service or delivering a product.
Ensure invoices include all necessary details, such as the breakdown of services, invoice number, due date, and accepted payment methods.
Use AR bookkeeping software to automate invoice generation and track pending payments.
Example: A medspa firm that provides laser treatments should send invoices the same day as the service. If they wait weeks, clients may forget, dispute charges, or delay payment.
3. Not Following Up on Late Payments
Many businesses hesitate to follow up on late payments in AR because they don’t want to damage customer relationships. However, failing to follow up can result in cash flow issues and uncollected revenue.
How to Fix It:
Set up a structured AR collections strategy with scheduled reminders:
3 days before due date: Friendly payment reminder
1 day after due date: Courtesy reminder
7 days late: Firm reminder with a mention of late fees
30+ days late: Consider engaging a collections agency
Automate email reminders to maintain professionalism while ensuring prompt follow-ups.
Train your team to handle overdue invoices tactfully while maintaining good customer relationships.
Using AR automation software can send automated follow-ups to reduce manual work and improve collection rates.
4. Ignoring the AR Aging Report
The AR aging report categorizes outstanding invoices based on how long they have been unpaid. Many businesses neglect reviewing this report, leading to cash flow issues and unnoticed overdue invoices.
How to Fix It:
Review your AR aging report at least weekly to track outstanding payments.
Prioritize collections on the oldest unpaid invoices to prevent bad debt.
Identify repeat offenders and consider adjusting their payment terms (e.g., requiring upfront deposits for future services).
Example: A medspa business offering Botox treatments should regularly review its aging report to ensure clients with outstanding balances are contacted before the debt becomes uncollectible.
5. Failing to Optimize AR Processes
Outdated manual invoicing and payment tracking systems increase the risk of AR errors, missed payments, and inefficiencies. Without an optimized system, businesses struggle to maintain a steady business cash flow.
How to Fix It:
Invest in AR automation to streamline invoicing, tracking, and follow-ups.
Integrate AR bookkeeping software with your accounting system for real-time financial insights.
Establish clear standard operating procedures (SOPs) for handling invoices and collections.
Using a small business accounting system with automated AR tracking can save hours of manual work and reduce missed payments.
DIY vs. Hiring a Professional: Which is Better?
Managing AR bookkeeping in-house requires time, effort, and expertise. While small businesses can manually track invoices using spreadsheets, this method often leads to errors and inefficiencies.
If your business struggles with frequent late invoice payments, untracked AR aging reports or inconsistent business cash flow, you should consider outsourcing a professional for your small business accounting to save time and increase collection rates. Irvine Bookkeeping specializes in small business accounting, helping you track invoices, optimize AR processes, and reduce late payments. Contact us today to ensure your business finance runs smoothly
Conclusion
Avoiding these common AR errors can greatly improve cash flow management and overall business stability. Whether you’re handling AR yourself or considering professional support, the key is consistency, automation, and strategic policies.
What AR challenges have you faced in your business? Share your experience in the comments below.
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