How to manage accounts receivable

business.gov.au's glossary treats accounts receivable as the record of customers' short-term accounts, under 12 months, that are still unpaid. In practice it is your unpaid customer invoices. Money owed to the business for other reasons, such as a loan it has made, is still owed but is kept apart from accounts receivable.

Your accounting method changes what the books show. Under accrual accounting, business.gov.au explains, a sale is recorded when it happens, so the amounts customers owe appear in your books. Under cash accounting, a sale is recorded only once the customer pays, so unpaid invoices don't show in the accounts. A business on cash accounting needs its own running list of unpaid invoices to know who owes what.

business.gov.au notes that credit is common between businesses: you supply the goods or services and the customer pays later, for example within 7, 14, 21 or 31 days. It says offering credit can increase sales but carries the risk that a customer pays late or not at all. To reduce that risk, it suggests:

• checking a customer's credit before you offer it
• setting a limit on the credit each customer can have
• making clear that the goods stay yours until the customer has paid in full.

Collect each customer's details when they first order, so every invoice can go to the right place. business.gov.au gives name, address, phone, email and ABN as examples.

business.gov.au describes payment terms as your rules on when and how customers pay, and notes that contract law treats them as part of the sale. It suggests putting them on your invoices and contracts so customers know:

• which payment methods you accept
• when you expect payment, such as up front, in instalments, on delivery or after 30 days
• whether you offer credit, and on what conditions
• how you collect overdue payments.

Payment methods matter too. business.gov.au links the two: customers are more likely to pay on time when they can use a method they prefer. Its advice on getting paid sooner also mentions early payment discounts, late payment fees, and deposits on special orders. If you use any of these, put them in your terms and ask your accountant how to record them.

A customer can't pay an invoice they haven't received, so invoicing late delays payment. business.gov.au suggests sending the invoice at the time of the sale, and invoicing on a regular timetable if you bill the same customers often, so they know when each one will arrive.

It lists details commonly included on an invoice:

• a unique invoice number and the date it was issued
• your business name, ABN and contact details
• the buyer's name or business name
• a description of what was sold, with quantity and price
• when and how you want to be paid.

Number invoices in sequence and don't reuse a number. A gap or a repeat in the sequence is one of the first things to check when the receivables list looks wrong.

Each payment that arrives should close, or reduce, a specific invoice. Matching it that way keeps every customer's balance true.

• Match the payment to the invoice it pays, using the reference the customer gave.
• When one payment covers several invoices, split it across them as the customer's remittance advice shows.
• Apply a part payment to its invoice and leave the rest of that invoice open.
• Keep a payment you can't identify separate, and ask the customer what it was for rather than guessing.
• Record a credit for returned goods or a price correction against the invoice it relates to.

Because each payment is matched, the balance at the end is simply what remains open on the second invoice, and the first invoice shows as paid.

An aged receivables report groups unpaid invoices by their age, so you can see at a glance where the risk sits.

When you read it, look for:

• the oldest amounts, which need action first
• customers with amounts in both overdue columns, a sign they are falling further behind
• customers who now pay later than they used to
• disputed amounts, which should carry a note saying why
• if you use accrual accounting, a total that differs from the receivables balance on your balance sheet, which points to an unmatched payment or an entry in the wrong place.

Customers often paying late, leaving you short of cash to cover costs, is one of the signs of a cash flow problem business.gov.au lists. A short weekly look at overdue invoices and a fuller review each month helps stop that building unseen.

business.gov.au recommends deciding in advance how you will chase late payments, beginning with a polite reminder. Our guide to chasing unpaid invoices sets out the steps. For customers who keep paying late, review their credit limit or terms, or move them to paying up front.

• Keep every invoice. business.gov.au notes that the law requires most business records to be kept for at least 5 years, on paper or electronically.
• At 30 June, keep a copy of the list of who owes you money. business.gov.au counts lists of debtors among the records to keep at the end of the year.
• business.gov.au defines bad debts as money owed to you that is not likely to be paid soon. How one is handled in the accounts is a question for your accountant.
• The ATO lists keeping track of money owed to you among the benefits of accurate and complete records.

A bookkeeper can take on this work: business.gov.au's list of what a bookkeeper may do includes preparing invoices and chasing overdue payments. Whoever keeps the records, the ATO holds the business owner primarily accountable for understanding the record-keeping obligations.