Accounts Receivable Management: Getting Paid Faster
For Ontario service businesses and B2B companies, accounts receivable represents the gap between delivering value and receiving payment. Poor AR management creates cash flow problems, increases bad debt write-offs, and consumes valuable time chasing payments. At BBS Accounting in Toronto, we help clients implement AR management systems that accelerate collections, improve cash flow, and reduce bad debts. This comprehensive guide shows you how to get paid faster.
Why AR Management Matters
Every dollar sitting in accounts receivable is money you’ve earned but can’t spend. It’s tied up, earning nothing, while you still need to pay your bills, employees, and suppliers.
The longer invoices remain unpaid, the less likely you’ll collect them. Industry data shows invoices paid within 30 days have 90%+ collection rates. After 90 days, collection rates drop below 70%. After six months, recovery rates plummet below 50%.
Additionally, poor AR management consumes management time better spent on revenue-generating activities. Hours spent chasing late payments don’t move your business forward.
Finally, excessive AR strains working capital. You might show profit on paper but struggle to make payroll because customers haven’t paid.
Understanding Your AR Metrics
Before improving AR management, understand your current performance.
Days Sales Outstanding (DSO): Average number of days to collect payment. Calculate as (Accounts Receivable / Revenue) × Number of Days. For a month: (AR Balance / Monthly Revenue) × 30. Lower DSO is better—means faster collection.
Example: AR balance is $50,000, monthly revenue is $100,000. DSO = ($50,000 / $100,000) × 30 = 15 days. Customers pay on average 15 days after invoicing.
Target DSO close to your payment terms. If you offer net 30 terms, DSO of 35-40 days is reasonable. DSO of 60+ days indicates collection problems.
AR Aging: Breakdown of receivables by age—current, 31-60 days, 61-90 days, 90+ days. Most AR should be current or 31-60 days. Significant amounts in older buckets signal problems.
Collection Effectiveness Index (CEI): Measures collection efficiency. CEI = [(Beginning AR + Monthly Sales – Ending AR) / (Beginning AR + Monthly Sales – Current AR)] × 100. Scores above 90% indicate effective collections.
At BBS Accounting, we track these metrics for clients monthly, identifying trends before they become problems.
Setting Clear Payment Terms
Prevention starts with clear terms communicated upfront.
Common Payment Terms:
Net 30: Payment due 30 days from invoice date. Most common for B2B transactions in Ontario.
Net 15: Payment due in 15 days. Used when you need faster payment or with riskier customers.
Net 60/90: Longer terms sometimes required by large corporate customers with established payment processes.
Due Upon Receipt: Immediate payment expected. Common for small transactions or service professionals.
2/10 Net 30: 2% discount if paid within 10 days, full amount due in 30 days. Incentivizes fast payment.
Progress Payments: For large projects, payments tied to milestones—25% upfront, 25% at midpoint, 50% on completion.
Choose terms balancing your cash flow needs with market expectations. Being too aggressive (demanding immediate payment when competitors offer net 30) loses business. Being too lenient (offering net 60 when net 30 is standard) unnecessarily delays collections.
Document Terms Clearly:
Include payment terms on every quote, proposal, contract, and invoice. Don’t assume customers know your terms—state them explicitly.
For new customers, have them sign a credit application acknowledging terms and providing financial information for credit decisions.
Professional Invoicing Practices
Invoices are your collection tools. Professional, clear invoices get paid faster than sloppy ones.
Invoice Promptly: Send invoices immediately upon project completion or, for ongoing services, on scheduled dates (1st of month, etc.). Every day you delay invoicing delays payment by a day.
Many businesses complete work Friday but don’t invoice until the following week—costing them 4-5 days of payment timing.
Include All Necessary Information: Your business name, address, and contact information. Clear “INVOICE” heading. Unique invoice number. Invoice date. Due date (specific date, not just “Net 30”). Customer name and address. Itemized description of products/services. Quantities and rates. Subtotal, HST/GST (if applicable), and total amount due. Payment instructions (accepted methods, where to send payment). Your HST/GST registration number if applicable.
Make Invoices Easy to Understand: Use clear descriptions, not internal codes or jargon. Break complex projects into understandable line items. Ensure math is correct—errors delay payment while customers seek clarification.
Electronic Invoicing: Email invoices as PDFs for immediate delivery. Use accounting software that emails invoices directly to customers. Some software tracks when invoices are opened, providing collection timing insights.
Electronic delivery is faster than mail (no transit time), cheaper (no postage), and provides proof of delivery.
Consider online payment integration (Stripe, Square, PayPal) allowing customers to pay invoices with one click. Easier payment means faster payment.
At BBS Accounting, we help Toronto clients set up efficient invoicing systems that accelerate collections.
Credit Policies and New Customer Screening
Not all customers pay reliably. Screen new customers before extending credit.
Credit Application: For B2B customers, require credit applications including business references, bank references, and trade references. Contact references to verify payment history.
Credit Checks: Use business credit bureaus (Equifax Business, Dun & Bradstreet) to check new customer creditworthiness. Credit checks cost money but prevent expensive bad debts.
Credit Limits: Establish maximum credit limits for each customer based on their creditworthiness and your risk tolerance. Don’t let any customer accumulate excessive AR—if they default, the loss hurts more.
Personal Guarantees: For small businesses, consider requiring owner personal guarantees on significant credit, providing recourse beyond the business if it fails.
Deposits or Prepayment: For new customers, large projects, or risky situations, require deposits (25-50% upfront) or even full prepayment. This reduces risk dramatically.
Some businesses have a “COD until established” policy—new customers pay upfront until they’ve successfully paid several invoices on time, then credit is extended.
Collection Procedures
Systematic follow-up accelerates collections significantly.
Pre-Due Date Reminder: 3-5 days before due date, send friendly reminder: “Your invoice for $X is due on [date]. Please let us know if you have questions or need the invoice resent.”
This proactive reminder prevents “I forgot” excuses and confirms the customer received the invoice.
Payment Due Date: On the due date, send a polite payment reminder: “Your invoice $X is due today. Please remit payment or contact us if there are issues.”
5 Days Overdue: Send firmer reminder stating invoice is now overdue: “Your invoice $X was due on [date] and is now 5 days overdue. Please remit payment immediately. If there’s a problem with the invoice, contact us to resolve it.”
15 Days Overdue: Phone call plus email. Direct conversation often reveals issues and prompts payment. Be polite but firm. Ask when you’ll receive payment and get commitment to specific date.
30 Days Overdue: More serious communication. Consider stopping work on ongoing projects or suspending service until payment is received. Warning that account may be sent to collections if not paid within 10 days.
45+ Days Overdue: If payment still not received and customer is non-responsive, consider collections agency or small claims court.
Key Points:
Be consistent—follow procedures for all customers. Don’t let some slide while pursuing others. Be professional but persistent—polite firmness works better than aggression. Document all communications—notes about phone calls, copies of emails, promises made. Escalate appropriately—start friendly, increase firmness as time passes.
Offering Payment Flexibility
Sometimes customers genuinely can’t pay in full immediately. Offering payment plans maintains relationships while collecting what’s owed.
Payment Plans: Break large amounts into monthly installments. “We understand $10,000 is challenging. Can you pay $2,500 monthly for four months?” Get written agreement documenting the plan and consequences of missed payments.
Partial Payments: Accept partial payment with commitment to pay remainder: “Pay $6,000 now, remaining $4,000 in 30 days.”
Early Payment Discounts: Offer 1-2% discount for payment within 10 days: “Pay within 10 days, take 2% off.” For customers, this is attractive return. For you, it’s worth the discount to get cash earlier.
Electronic Payment Options: Some customers prefer credit cards, even though it costs you processing fees. Offering this option gets you paid faster, and the fee (2-3%) may be worth it compared to waiting 30-60 days.
At BBS Accounting, we help clients balance flexibility with firmness—being accommodating when appropriate while ensuring receivables don’t age excessively.
When to Write Off Bad Debts
Despite best efforts, some receivables are uncollectible.
Indicators an AR is Uncollectible: Customer has gone out of business or declared bankruptcy. Customer is unresponsive for 90+ days despite multiple contact attempts. Amount is too small to justify collection agency fees or legal action. Your attorney advises the debt is legally uncollectible.
Write-Off Process: For tax purposes, bad debts are deductible if you use accrual accounting and previously reported the income. Document your collection efforts—save emails, call logs, letters sent. Write off the receivable in your accounting system, moving it from AR to bad debt expense.
For amounts over $1,000-2,000, consider collections agencies (they take 25-40% of recovered amount) or small claims court before writing off.
Tax Treatment: Bad debts are deductible business expenses. The CRA requires documentation showing you made reasonable efforts to collect before claiming the deduction.
Technology Solutions
Modern tools dramatically improve AR management.
Accounting Software: QuickBooks Online, Sage, Xero, and FreshBooks all have AR management features: automatic invoice reminders, online payment integration, AR aging reports, and customer payment history.
Automated Reminders: Set up automatic email reminders at key intervals (due date, 5 days overdue, 15 days overdue). Automation ensures consistent follow-up without manual effort.
Online Payment Portals: Integration with Stripe, Square, or PayPal allows “View and Pay Invoice” links in emails. One-click payment reduces friction.
Mobile Payment Apps: E-transfer (Interac) is standard in Canada. Include e-transfer instructions on invoices for immediate payment option.
AR Management Software: Specialized tools like Chaser, Billings, or Harvest focus specifically on receivables management with advanced automation and analytics.
At BBS Accounting, we help clients select and implement technology appropriate to their business size and needs.
Industry-Specific Considerations
Contractors and Trades: Construction liens provide security for unpaid work on properties. Register liens promptly if customers don’t pay—this motivates payment. Consider progress payments tied to project phases.
Professional Services: Retainer agreements with monthly payments stabilize cash flow. Bill smaller amounts more frequently rather than large amounts quarterly.
Retail/E-commerce: Require payment at point of sale whenever possible. For wholesale accounts, use strict credit limits and aging cutoffs.
Consulting: Milestone billing (25% at engagement start, 25% at interim point, 50% at delivery) reduces risk compared to billing everything at project end.
Legal Options for Delinquent Accounts
When customers refuse to pay despite being able to, legal options exist.
Demand Letter: Attorney-written letter demanding payment within specific timeframe (typically 10 days) or face legal action. Often prompts payment because customers realize you’re serious. Cost: $200-500.
Small Claims Court: For amounts under $35,000 in Ontario, small claims court provides relatively simple, inexpensive process. Filing fee: $102-$320 depending on amount. No attorney required, though you can hire one. If you win, customer must pay, though collection may still require effort.
Collections Agency: Agencies pursue delinquent accounts for 25-40% of recovered amount. They handle all communication and legal action if needed. Only financially viable for amounts over $1,000-2,000.
Credit Reporting: Report non-payment to business credit bureaus. This damages customer’s business credit, motivating payment to avoid further damage.
Preventing Future AR Problems
Regular Review: Review AR aging weekly. Address overdue accounts immediately, not after they’re 60+ days old. Calculate and track DSO monthly. If it’s rising, investigate why and implement corrections.
Customer Communication: Maintain good relationships with customers. Satisfied customers pay more reliably than dissatisfied ones. Address service issues promptly before they become payment excuses.
Contract Terms: For large projects or risky customers, include remedies for non-payment in contracts: interest on late payments, suspension of work, collection cost reimbursement.
Business Credit Insurance: For businesses with significant B2B receivables, credit insurance protects against customer defaults. Premiums typically 0.5-2% of insured receivables.
Working with BBS Accounting
At BBS Accounting in Toronto, we provide AR management support including: AR aging analysis and metrics tracking, collection procedures implementation, technology recommendations and setup, credit policy development, legal option guidance, and ongoing monitoring and reporting.
Many clients reduce DSO by 20-40% within months of implementing our recommended procedures, significantly improving cash flow.
The Bottom Line
Accounts receivable management directly impacts cash flow, profitability, and business stress levels. Professional, systematic AR management gets you paid faster, reduces bad debts, and frees your time for revenue-generating activities.
Don’t let receivables age beyond your payment terms. Implement clear policies, professional invoicing, systematic follow-up, and appropriate technology. Your work has value—ensure you’re paid for it promptly.
Contact BBS Accounting today to review your AR management practices. We’ll analyze your current DSO and aging, identify improvement opportunities, recommend procedures and technology, and help you implement systems that get you paid faster. Better AR management means better cash flow—let us help you achieve that.