For many small businesses, the gap between doing the work and getting paid is the real constraint. Profitable companies run out of cash because customers pay slowly and nobody owns the follow-up. Accounts receivable (AR) services exist to close that gap.
What AR services typically cover
- Creating and sending invoices on time and in the agreed format, with correct terms and tax.
- Setting up payment options so customers can pay easily by ACH, card, or other methods.
- Applying payments to the right invoices and matching deposits to the bank.
- Monitoring the aging report and following up on past-due balances.
- Sending statements and reminders on a set schedule.
- Tracking credits, refunds, deposits, and disputes.
- Reporting on outstanding receivables and collection trends.
Why the aging report matters
An aging report groups unpaid invoices by how long they have been outstanding. It tells you who owes you, how much, and for how long. The older an invoice becomes, the harder it usually is to collect. A good AR service reviews this report on a regular schedule and acts on it, not just produces it.
A sensible follow-up process
- 1Send the invoice promptly, with clear terms and payment instructions.
- 2Send a friendly reminder shortly before the due date.
- 3Follow up the day after the due date by email and, if needed, phone.
- 4Escalate in stages with a clear final notice, and decide in advance what happens after that, such as pausing service.
- 5Document every contact in case of dispute.
- 6Agree on payment arrangements where appropriate, and put them in writing.
Accounting treatment of unpaid invoices
Your accounting method decides how receivables show up in your taxable income. The IRS explains in Publication 538 that under the accrual method income is reported when it is earned, whether or not payment has arrived, while under the cash method income is reported when it is actually or constructively received. That has a direct consequence: a cash-basis business generally has not reported income for an unpaid invoice, so there is generally nothing to write off if the customer never pays. For more, see cash vs accrual accounting.
Bad debts
- A business bad debt is generally deductible only if the amount was previously included in income or represents money you loaned or goods you purchased.
- You generally need to show the debt became worthless, with evidence of collection efforts.
- Record the write-off in the period it is determined to be uncollectible, with documentation.
- Talk to your preparer before writing anything off, since the rules differ by method.
Sales tax on invoices
If you invoice before you collect, you may owe sales tax in some states on the invoice date rather than the payment date, depending on state rules. Rules differ by state, so confirm with each state where you file. See sales tax filing services.
Choosing an AR service
- Does the provider act in your name, and how are customer communications handled? Tone matters to your relationships.
- Who has access to payments and how are funds received?
- How are disputes escalated back to you?
- What reporting do you receive and how often?
- How does the work connect to your bookkeeping? See QuickBooks bookkeeping services.
- How is the service priced? Typical models include a monthly fee based on invoice volume or a set fee per month for follow-up work. We do not quote figures because we could not verify reliable market data.
Things you can do yourself first
- Invoice immediately when work is done or on a fixed schedule.
- Ask for a deposit or progress payments on larger jobs.
- State payment terms on every invoice and contract.
- Offer easy digital payment options.
- Review the aging report weekly.
Our bookkeeping service includes invoice tracking and aging reviews, and pairs with accounts payable outsourcing for the other side of cash flow. To discuss your bookkeeping needs, tell us how many invoices you send each month and how long customers typically take to pay.
