Accounts Receivable SOP
An accounts receivable SOP is a documented set of procedures that standardizes how an organization generates invoices, tracks payments, manages collections, and reconciles customer accounts.
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What is an Accounts Receivable SOP?
An accounts receivable SOP lays out exactly how your team should invoice customers, keep tabs on incoming payments, and chase down overdue accounts. As a specialized standard operating procedure, these AR procedures sit at the heart of your order-to-cash cycle, giving finance folks a reliable playbook for managing the money customers owe you.
Good accounts receivable procedures touch on everything from sizing up a customer's credit to actually collecting that final payment. Your AR SOP should spell out how fast invoices go out after delivery, which payment terms apply to different customer segments, when to follow up on late accounts, and who steps in when the usual collection efforts hit a wall.
Why does this matter? Organizations rely on these documented procedures to keep cash flowing steadily, cut down on bad debt write-offs, and hold Days Sales Outstanding (DSO) where it should be. Maintaining a proper audit trail also makes compliance easier. When everyone on the team works from the same collections procedures, fewer things slip through the cracks. And honestly, customer relationships tend to hold up better even when payments run late.
Key Characteristics of an Accounts Receivable SOP
- Credit Evaluation Process: Guidelines for figuring out whether a customer is creditworthy before you extend payment terms. This includes what information to gather and who needs to sign off at different dollar thresholds.
- Invoice Generation Standards: Rules around when invoices must go out (usually within one business day of shipment or service delivery), what they need to include, and how they reach the customer.
- Payment Application Procedures: The steps for logging incoming payments, matching them against open invoices, and sorting out partial payments or disputed charges.
- Collections Escalation Timeline: A laid-out schedule for chasing overdue accounts, starting with friendly nudges and progressing through formal collection letters all the way to third-party agency handoffs if needed.
- Reconciliation Requirements: Weekly or monthly routines for checking AR records against the general ledger and clearing up any mismatches.
Accounts Receivable SOP Examples
Example 1: Professional Services Firm
A consulting firm sets up AR procedures requiring invoices to ship within 24 hours of hitting a project milestone. Payment reminders go out automatically at 7, 14, and 30 days past due. Once an account hits 45 days late, the account manager gets pinged to pick up the phone and call the client. The SOP also makes clear that any account more than 60 days overdue needs CFO sign-off before the firm takes on additional work for that client.
Example 2: Wholesale Distributor
A food distributor builds accounts receivable procedures that deliberately separate who approves credit from who handles collections. It is a basic internal control, but it matters. New customers fill out a credit application and get approved before their first shipment leaves the warehouse. The SOP includes call scripts for collection conversations, letter templates for each escalation stage, and specific criteria for when to cut off a customer's credit.
Accounts Receivable SOP vs Accounts Payable SOP
AR and AP procedures live on opposite sides of the cash flow equation, so they need different controls and workflows.
| Aspect | Accounts Receivable SOP | Accounts Payable SOP |
|---|---|---|
| Focus | Incoming payments from customers | Outgoing payments to vendors |
| Key Metric | Days Sales Outstanding (DSO) | Days Payable Outstanding (DPO) |
| Primary Risk | Bad debt and uncollected revenue | Fraud and duplicate payments |
| Main Activities | Invoicing, collections, credit management | Invoice processing, payment approvals |
How Glitter AI Helps with Accounts Receivable SOPs
Glitter AI takes the pain out of documenting AR procedures that people will actually use. Finance teams can record their invoicing and collections workflows while Glitter automatically builds step-by-step instructions complete with screenshots of every system interaction. This captures the exact clicks and menu paths that written procedures often gloss over or skip entirely.
When your billing system gets an upgrade or collection policies shift, teams can update their documentation by simply recording the new process. You end up with AR procedures that reflect what actually happens day to day, which helps new hires in accounts receivable ramp up faster without someone hovering over their shoulder.
Frequently Asked Questions
What is an accounts receivable SOP?
An accounts receivable SOP is a documented set of procedures that standardizes how an organization generates invoices, tracks customer payments, manages collections, and reconciles accounts. It keeps cash collection consistent and helps reduce bad debt risk.
What should be included in accounts receivable procedures?
AR procedures should cover credit evaluation, invoice timing and format, payment application steps, collections escalation timelines, dunning letter templates, account reconciliation processes, and criteria for writing off bad debt.
Why are accounts receivable SOPs important for cash flow?
Accounts receivable SOPs make sure invoices go out on time, payments get applied correctly, and past-due accounts get timely follow-up. Consistent AR procedures bring down Days Sales Outstanding and free up cash that would otherwise sit in uncollected receivables.
How often should AR procedures be reviewed?
Most organizations look at accounts receivable procedures once a year or whenever billing systems, payment terms, or collection policies change significantly. Regular reviews help keep procedures aligned with how things actually work and any regulatory requirements.
What is Days Sales Outstanding in accounts receivable?
Days Sales Outstanding (DSO) measures the average number of days it takes to collect payment after making a sale. A lower DSO means faster collection. Organizations with solid AR procedures typically aim to keep DSO under 30 to 45 days.
Who creates accounts receivable SOPs?
Usually the accounts receivable manager or controller takes the lead, often pulling in credit managers and the CFO for input. The staff who handle daily billing and collections should also review the procedures to make sure they match real workflows.
How do collections procedures reduce bad debt?
Collections procedures set up consistent follow-up timelines, escalation triggers, and clear ownership. When you reach out to past-due accounts early and systematically, customers are more likely to pay before the debt becomes uncollectible.
What is the difference between AR policies and AR procedures?
AR policies lay out the rules for accounts receivable, like offering net-30 terms to approved customers. AR procedures are the step-by-step instructions for putting those policies into action, covering exactly how to set up customers, create invoices, and collect payments.
How can automation improve accounts receivable procedures?
AR automation speeds up invoice delivery, fires off payment reminders on schedule, matches payments to invoices automatically, and flags accounts needing collection attention. Paired with documented procedures, automation cuts down manual work and gets cash in the door faster.
What metrics should AR procedures track?
Key AR metrics include Days Sales Outstanding, Average Days Delinquent, bad debt percentage, collection effectiveness index, and invoice dispute rate. Keeping an eye on these numbers shows you where AR procedures might need some work.
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