Accounts receivable management: process, KPIs and late payment rules

What is accounts receivable management?

Accounts receivable (AR) is the money customers owe you for goods or services you have delivered but not yet been paid for. It sits on your balance sheet as a current asset. Accounts receivable management is the set of rules and routines that decide who gets credit, on what terms, and what happens on each day an invoice stays open, until it is paid, settled or written off.

The goal is to turn sales into cash as fast as possible, with as little written off as possible, without losing the customers you want to keep. Three numbers tell you how well it works: how many days it takes to get paid (DSO), how much of your balance is overdue, and how much you end up writing off as bad debt.

AR management, credit control and collections

The 5 Cs of credit

Most credit policies score a new customer on five factors before you agree terms:

• Character: how the customer has paid other suppliers, and its reputation.
• Capacity: whether its cash flow can cover your invoices on time.
• Capital: its financial strength, such as equity and reserves.
• Collateral: security you could fall back on, such as a guarantee or retention of title.
• Conditions: the size and purpose of the order, the customer's sector and the economy around it.

Why accounts receivable management matters

Late payment is common. Intrum's European Payment Report 2026, based on 8,385 businesses in 20 European countries, found that the share of revenues received late has risen above 12 percent. The B2B payment gap, the difference between agreed terms and actual payment time, widened from 16 days in 2023 to 20 days in 2026, and 62 percent of businesses say late incoming payments make them pay their own suppliers late.

The US picture is similar. Atradius reports that US businesses sell on credit for an average of 45% of their B2B sales, that late payments affect an average of 22% of B2B receivables, and that US companies often report losing 1% to 2% of their B2B invoices as bad debt.

Every day of DSO is cash you have earned but cannot use. A business with $4.8 million a year in credit sales has about $13,150 of sales tied up for each day of DSO ($4,800,000 / 365). Cut DSO by 10 days and you free about $131,500, without selling anything more. (Illustrative figures.)

The accounts receivable process, step by step

The accounts receivable process runs from the moment you agree to sell on credit to the moment the cash is matched to the invoice. These are the nine steps, in the order they happen.

1. Check credit before you say yes. Pull a credit report, check the company register, ask for trade references and set a credit limit. Review limits for existing customers at least once a year and whenever an order is unusually large.
2. Agree payment terms in writing. Due date, currency, accepted payment methods, early payment discount if any, late payment interest and recovery costs. Get the terms accepted before work starts. See our guide to payment terms for clauses and wording.
3. Invoice the day you deliver. Every day you wait to invoice is a day added to DSO. Send it to the person who approves payment, not only to the person who ordered.
4. Record the receivable. Post the invoice to the AR ledger (debit accounts receivable, credit revenue) so it shows in your aging report.
5. Remind before the due date. A short note a week before the due date catches missing purchase order numbers and wrong addresses while there is still time to fix them.
6. Follow up on a fixed schedule. Run the same dunning sequence for every customer, with set days, channels and tone. The schedule below is a starting point.
7. Resolve disputes fast. Log every dispute, give it an owner and a deadline, and split it from the undisputed part of the invoice so the rest can be paid.
8. Apply cash and reconcile. Match each payment to the right invoice, chase short payments the same day and reconcile the AR ledger with the bank every month.
9. Escalate or write off. When your own steps have run out, hand undisputed claims to a collection partner, take legal advice on disputed ones, and write off what cannot be recovered.

What every invoice should show

• Invoice number, issue date and due date (a date, not only "net 30")
• Customer's legal name, address, company registration or VAT number, and purchase order number
• What was delivered, when, and at what price
• Bank details and a payment link
• Your late payment terms: interest rate and recovery costs
• A named contact for questions

The accounts receivable aging report

An AR aging report groups open invoices by how long they are past due. It is the single most useful view in accounts receivable management: it tells you where the money is, how old it is and who to call first. Review it every week.

Aging buckets and what to do in each

Example aging report

How to read it: about 60% of the balance is current ($80,000 of $133,500), which is healthy. Customer C is the problem. It has no current invoices, which often means it has stopped ordering, and its balance grows with every bucket. That account needs a final notice this week and a decision on escalation. Customer B has started to slip into the 31 to 60 bucket and needs a phone call, not another email.

A dunning schedule you can copy

Dunning is the sequence of reminders you send as an invoice ages. A fixed schedule beats ad hoc chasing because customers learn that your due dates are real. Adjust the days to your terms and your customers, then apply it to everyone.

Rules that make the schedule work

• One owner per account. The customer always knows who to call.
• Attach the invoice to every reminder. "We never got it" stops working.
• Log every call and confirm every promise in writing the same day.
• Pause the schedule only for a logged dispute, and only for the disputed amount.
• Do not skip the final notice. It is often the message that gets paid, and it is the record you need if you escalate.

Final notice template

Subject: Final notice: invoice [number], [amount] overdue since [due date]

Dear [name],

Invoice [number] for [amount] was due on [due date] and remains unpaid despite our reminders of [dates]. Under our terms, late payment interest of [rate] and recovery costs of [amount] now apply, bringing the total to [total].

Please pay [total] by [date, 7 to 10 days from today] using the details below. If you dispute any part of the invoice, tell us in writing by the same date.

If we do not receive payment or a written dispute by [date], we will pass the claim to our collection partner without further notice.

[Name, role, direct phone]

Accounts receivable KPIs, with formulas and worked examples

Track a small set of accounts receivable metrics every month and look at the trend, not one month on its own. The Credit Research Foundation publishes US median benchmarks each quarter; the latest figures are in the table.

DSO, best possible DSO and ADD: worked example

A company sells on net 30 terms. In a 90-day quarter it makes $1,200,000 of credit sales. At quarter end it has $520,000 in open receivables, of which $400,000 is not yet due.

• DSO = $520,000 / $1,200,000 x 90 = 39 days
• Best possible DSO = $400,000 / $1,200,000 x 90 = 30 days
• ADD = 39 minus 30 = 9 days

The terms are working (best possible DSO matches net 30), but customers pay 9 days late on average. That points to follow-up, not credit policy. To reduce DSO, fix the dunning schedule first.

CEI: worked example

For one month: beginning AR $500,000, credit sales $400,000, ending total AR $450,000, ending current AR $300,000.

• Collected = $500,000 + $400,000 minus $450,000 = $450,000
• Collectible = $500,000 + $400,000 minus $300,000 = $600,000
• CEI = $450,000 / $600,000 x 100 = 75

You collected 75% of what you could have collected that month. CEI is the best single KPI for the collections team because, unlike DSO, it does not move when sales go up or down.

AR turnover and bad debt ratio: worked example

Annual net credit sales of $4,800,000 and average AR of $480,000 give a turnover of 10. You collect your average balance 10 times a year, or about every 36.5 days (365 / 10). Write-offs of $24,000 on the same sales give a bad debt ratio of 0.5%.

All worked examples on this page use illustrative figures.

Late payment interest and fees: EU, UK and US rules

Charging interest on late invoices is one of the strongest levers in accounts receivable management. In the EU and the UK, the law gives B2B creditors interest and a fixed recovery fee even if the contract says nothing. In the US, it mostly comes down to your contract.

Worked example: UK statutory interest

You are owed GBP 10,000 and the invoice is 60 days late. If the Bank of England base rate were 4%, statutory interest would be 12% a year: GBP 1,200 a year, or about GBP 3.29 a day. After 60 days that is about GBP 197.26 in interest, plus a fixed GBP 100 in recovery costs. (Illustrative base rate; check the current rate before you claim.)

How to use interest in practice

• Put the rate and the recovery fee in your terms and on every invoice, so no customer can say they did not know.
• Mention it in the second reminder and claim it in the final notice. You can offer to waive it in exchange for payment by a set date.
• For cross-border sales, the law that governs the contract decides which rules apply. Inside the EU, the directive sets the floor everywhere, so a German or French customer owes at least the EU minimum even if your contract is silent.
• In the US, write a late fee or interest clause into your contract. Without one, you may have little to claim beyond the invoice amount.

When to escalate an unpaid invoice to collection

Escalate when your own process has run its course and the customer is no longer engaging. Waiting rarely helps: the older a claim gets, the harder and more expensive it is to recover. These signs mean it is time:

• The final notice deadline has passed with no payment and no written dispute.
• The customer has broken two payment promises.
• No reply to calls or emails for two weeks or more.
• The invoice is 45 to 60 days past due with no agreed payment plan.
• Warning signs: the contact person leaves, the customer stops ordering, other suppliers are chasing, or there are signs of insolvency.

Undisputed and disputed claims

A collection agency works best on undisputed claims: the customer agrees it owes the money but is not paying. If the customer disputes the quality, the quantity or the price, settle the disputed part or take legal advice. Split the invoice where you can, so the undisputed part can be collected now.

Cross-border claims

Chasing a customer abroad from your own office is slow. Reminders in your language carry little weight, you may not know local interest rules or court procedures, and a phone call from another country is easy to ignore. A local agency or law firm in the debtor's country speaks the language, knows the local rules and can take the next legal step there if needed. That is usually the fastest route for foreign invoices.

What to have ready before you escalate

• The contract, order or terms the customer accepted
• All unpaid invoices and proof of delivery
• Your reminders, final notice and a log of calls and promises
• The debtor's full legal name, address and company registration number
• Any written acknowledgment of the debt or any dispute raised

For how the collection stage works, what it costs and what to expect, read our debt collection guide.

Accounts receivable best practices

These are the habits that separate an AR function that collects on time from one that chases. Most cost nothing but discipline.

1. Write a one-page credit policy. Who approves credit, standard terms, credit limits, when to put an account on hold, when to escalate.
2. Check credit on every new customer. And on existing customers when order size jumps.
3. Agree terms before work starts. In writing, accepted by the customer, including interest and recovery costs.
4. Invoice on delivery, accurately. One wrong PO number can add weeks.
5. Make paying easy. Payment link, bank transfer, card for smaller invoices, clear remittance details.
6. Remind before the due date. Catch approval problems while the invoice is still current.
7. Run one dunning schedule for everyone. Same days, same steps, no exceptions without a logged reason.
8. Use the phone from day 10. A call gets a date; an email gets ignored.
9. Review the aging report weekly. Work from the largest balances in the oldest buckets.
10. Escalate on a rule, not a feeling. Set the day (for example 45 days past due after a final notice) and stick to it.

Common excuses and how to answer them

What to automate in accounts receivable

Automation helps most where the work is repetitive and rule-based. Keep people on the conversations that need judgment.

Most accounting systems handle reminders and aging. The gap is usually the last step: getting overdue claims out of the ledger and into collection without manual work. Our debt collection software guide compares the options, and the Debitura integrations let you send claims to collection straight from your own systems.

How Debitura fits into your AR process

Debitura is a debt collection platform for the step after your final notice. You submit an undisputed unpaid invoice, and Debitura matches the claim to a licensed local collection agency or law firm in the debtor's country, which collects under local law. You sign one agreement, the Standard Debt Collection Agreement, and it applies to every country.

• 180 countries covered, for claims against businesses and consumers.
• $0 upfront. You pay a success fee only when money is recovered: from 6% in Europe and 7.5% elsewhere, depending on claim size and the debtor's country. You see the fee before you submit. See pricing.
• Median 33 days to first payment and median 44 days to close, European cases.
• One platform for every case, message and payment, with case chat directly with your collector.
• Connects to your AR stack: CSV import, accounting integrations, Zapier and a REST API with webhooks.
• Legal action is optional, quoted separately, and starts only if you accept.

Claims older than 12 months cost more, and the uplift is shown before you submit. One more reason to escalate on a fixed rule. Read how it works, or see how late payment differs by country in our Global Collection Report.

More accounts receivable guides

• Cross-border transactions: managing accounts receivable internationally
• Bankruptcy and its impact on accounts receivable
• Tax implications of accounts receivable
• Managing accounts receivable and inventory
• Mergers and acquisitions and accounts receivable