Accounts receivable and collections: getting invoices paid

Getting paid is a workflow, not an event. The businesses that collect quickly are rarely the ones with the most aggressive collection calls — they are the ones whose invoices go out the day the work ships, contain everything the customer's own payables process needs, and are followed by a boringly predictable sequence of reminders. Accounts receivable (AR) is that workflow: invoice, record, age, remind, escalate, and — occasionally, honestly — write off.

The entry that starts it all

On accrual books, issuing an invoice is a recordable event: you have earned revenue and acquired an asset — the customer's promise to pay.

Account	Debit	Credit
Accounts receivable — Meridian Design LLC	3,500
Service revenue		3,500

Accounts receivable is an asset; a debit increases it. Your software posts this automatically when you create the invoice.

When payment lands:

Account	Debit	Credit
Cash — operating checking	3,500
Accounts receivable — Meridian Design LLC		3,500

Apply the payment to the specific invoice. Never categorize a customer payment from the bank feed as fresh income — that double-counts revenue and strands an open invoice.

That second note is the most common AR bookkeeping error: recording the invoice and categorizing the deposit as income. Revenue gets counted twice and the aging report fills with invoices that were actually paid — which then triggers embarrassing reminder emails to customers who owe nothing. If money arrives before the work is done, it is not revenue yet at all; see recording customer deposits.

Invoicing standards that get invoices paid

Most "slow payers" are actually slow invoices. An invoice that stalls in the customer's own accounts payable process — missing a PO number, unclear about what was delivered, silent on how to pay — waits at the bottom of someone else's pile. The standards:

1. Send the invoice the day the work is delivered or the milestone hits. Every day between delivery and invoice is a day added to your collection time, at 100% probability.
2. Include everything the payer's process needs: your legal name and address, a unique invoice number, issue date, explicit due date (a real date, not just "net 30"), itemized description, the customer's PO or reference number if they use one, and exact payment instructions.
3. Make paying frictionless. Every payment method you accept, stated on the invoice; a payment link if your software offers one. Businesses that add online payment options routinely see collection times drop by days.
4. Send it to the right inbox. Ask new customers where invoices go — often an AP address, not your contact's.

The eight-element checklist covers the anatomy in detail, including sequential numbering, which also matters for your own audit trail.

Payment terms: choose them, state them, mean them

Terms are a decision, not a default. Net 30 is customary in B2B services but nothing requires it — due on receipt, net 10, or 50% upfront with the balance on delivery are all legitimate, and shorter terms are increasingly normal for small firms. Three principles:

• State terms before the work starts, in the engagement letter or contract — the invoice should confirm terms, never introduce them.
• Require deposits for large or new-customer jobs. A deposit converts a collection risk into a liability you hold — a far better position.
• Offering an early-pay discount (2/10 net 30 style) is the mirror image of the payables arithmetic: you are paying roughly a 37% annualized rate to accelerate cash. Offer it only if the cash timing is genuinely worth that.

The aging report as a weekly ritual

The AR aging report buckets every open invoice by days outstanding. It is the single most useful collections document you own, and it only works read weekly.

A sample aging for a small services firm — the shape to watch is the rightward drift.

Reading it: Meridian is healthy. Harbor & Finch has two invoices aging in sequence — a pattern, not an accident; the next job should require a deposit. Coastal's $5,400 at 61–90 days is this week's phone call, today. Bright Owl's $1,200 over 90 days is a candidate for final demand or write-off — while they continue placing new orders, which is a credit-hold conversation.

Industry collection data consistently shows recovery odds falling as invoices age — commonly cited figures put expected recovery at roughly 90%+ inside 30 days, falling toward half by six months and to a coin flip's poor cousin beyond a year. The exact numbers vary by study; the direction never does.

Current$3,500

Current$3,500

1–30 days$3,150

1–30 days$3,150

31–60 days$1,800

31–60 days$1,800

61–90 days$5,400

61–90 days$5,400

Over 90 days$1,200

Over 90 days$1,200

From the aging table above. A healthy book concentrates in the two left buckets; this firm's largest bucket is 61–90 days.

The reminder cadence

Collections is mostly the removal of silence. A fixed cadence, applied to every invoice without personal judgment calls, keeps it professional and keeps you from procrastinating on awkward emails:

1. Due date minus 5: friendly reminder — invoice attached, due date restated, payment link included.
2. Due date plus 1: notice — "our records show invoice #1042 is now past due"; attach it again.
3. Plus 14: firmer email plus a phone call. The call matters — many disputes and lost invoices surface only when a human asks.
4. Plus 30: escalation letter — statement of account, late fees if your terms provide them, a specific date by which you expect payment, and a pause on new work.
5. Plus 60: final demand and a decision — payment plan, small-claims court, a collection agency (which typically keeps 25–50% of what it recovers), or write-off.

Automate steps 1 and 2 in your software; do steps 3 onward personally. And never let new work ship to a customer sitting in bucket 3 or beyond — the leverage you have is the leverage you keep.

Late fees: legal, disclosed, and mostly a deterrent

You may generally charge late fees if — and only if — the fee was disclosed before the work was done: in the contract and repeated on the invoice, typically as 1–1.5% per month or a flat amount. State usury and late-fee laws cap what you can charge, and they vary; check your state before setting a rate above the customary range. You cannot retroactively add fees to invoices that never mentioned them. In practice the fee's value is deterrence and negotiating room — waiving an accrued fee in exchange for immediate payment in full is a trade worth making. When you do charge one, invoice it separately and record it as other income when collected, not when assessed.

When to write off — and the entry

Some invoices die. When the customer is unreachable, insolvent, or the amount no longer justifies the pursuit, write it off — deliberately, with an entry, and never by deleting the invoice. Deleting rewrites history: it erases the revenue you reported, breaks your invoice number sequence, and destroys the record that you made and pursued a legitimate claim.

Account	Debit	Credit
Bad debt expense	1,200
Accounts receivable — Bright Owl Media		1,200

The direct write-off method. Most software does this via a credit memo applied to the invoice, which posts the same entry.

Two caveats. For tax purposes, a bad-debt deduction requires that the revenue was previously included in income — accrual-basis taxpayers generally can deduct genuine business bad debts, while cash-basis taxpayers usually cannot deduct unpaid invoices because the income was never reported in the first place; the accounting-method rules are in Publication 538 and the recordkeeping expectations in Publication 583. And if a written-off customer later pays, reverse course gracefully: debit cash, credit bad debt recovery (other income). Larger businesses maintain an allowance for doubtful accounts — a running estimate rather than invoice-by-invoice write-offs — but the direct method is standard and defensible at small-business scale.

Factoring, honestly described

Factoring means selling your receivables to a finance company: they advance you most of the invoice face value now (commonly 70–90%), collect from your customer, and remit the remainder minus their fee — typically 1–5% of face value per 30 days the invoice is outstanding. Annualized, that is expensive money, frequently north of 20–40%.

It is not a scam, and it has legitimate uses: a business growing faster than its cash cycle, with creditworthy customers on genuinely long terms (net 60–90 government or enterprise work), can rationally rent the factor's balance sheet for a season. But go in clear-eyed. "Recourse" factoring — the common kind — means unpaid invoices come back to you, so you keep the credit risk while paying for the cash. Your customers will be paying, and sometimes hearing from, a finance company, which changes the relationship. And factoring as a permanent operating habit usually means the underlying problem — terms too long, margins too thin, or collections too passive — is going unfixed at compounding cost. Exhaust the free tools first: same-day invoicing, deposits, shorter terms, and the weekly cadence above. They fix most AR problems, and their fee is zero.

The weekly AR routine

One session weekly, in this order — pair it with the payables checklist for a single money hour.