The biggest customer is sixty-four days past due on an invoice for nine thousand, four hundred and seventy dollars. Two reminder emails have gone unanswered. A polite phone call yesterday went to voicemail. The relationship is good (the customer has been paying for three years, the work is ongoing) but something has shifted in their accounts payable process and the business now has nine thousand dollars of capital tied up waiting for that something to resolve. Payroll is Friday. The math on the credit line is the math the owner is trying not to do.
Accounts receivable management is the discipline that keeps that situation from happening, or, when it happens, produces a response that doesn’t damage the relationship while resolving the cash gap. The work isn’t dramatic. It’s a sequence of small decisions about payment terms, collection cadence, customer communication, and the threshold at which receivables become bad debt. A business that runs the discipline well rarely faces the credit line math at the top of this guide; a business that doesn’t faces it more often than the relationship explanation accounts for.
The aging report and what it actually shows
Every accounting system produces an aging report: a list of outstanding receivables broken down by how long they’ve been outstanding. The standard categories:
- Current (not yet due)
- 1-30 days past due
- 31-60 days past due
- 61-90 days past due
- 91+ days past due
A healthy aging report has most of the balance in Current and 1-30. A deteriorating aging report has the balance shifting into 31-60 and beyond. The shape of the report tells the truth about collection performance more reliably than any single metric. A business that watches the report monthly catches deterioration when it’s still small; a business that watches only at year-end catches it after the receivables have aged into harder-to-collect territory.
The American Institute of Certified Public Accountants frames the aging report as one of the basic monthly review documents for any business with material accounts receivable: the trend matters more than any single month’s snapshot, and the trend only becomes visible through consistent monthly review.
Payment terms and what they actually communicate
Payment terms set expectations. The common terms:
- Due on Receipt: payment expected immediately
- Net 15: payment due fifteen days from invoice date
- Net 30: payment due thirty days from invoice date (most common)
- Net 45 / Net 60: longer terms, typically negotiated for larger customers
- 2/10 Net 30: 2% discount if paid within 10 days, otherwise full amount due in 30
The terms aren’t just legal language; they’re a communication about urgency and relationship. Net 30 is the standard term for B2B service work in most industries. Net 15 communicates faster expectations and fits smaller transactions or new customers. Net 45 or 60 typically reflects negotiation power on the customer side and shifts the cash flow burden to the supplier.
A business that issues invoices without specifying terms defaults to whatever the customer’s accounts payable cadence happens to be, which is often slower than ideal. The National Association of Credit Management’s guidance on commercial credit reinforces the principle that explicit terms produce more predictable collection than implicit expectations.
The collection cadence
A collection cadence is the sequence of communications a business sends as a receivable ages. A reasonable cadence for B2B work:
| Days past due | Action |
|---|---|
| 0 (invoice date) | Issue invoice with clear due date and payment instructions |
| 7 days before due | Friendly reminder if customer historically pays late |
| 1-7 days past due | Polite reminder email with invoice attached |
| 8-14 days past due | Second reminder, request acknowledgment |
| 15-30 days past due | Phone call to confirm receipt and timing |
| 31-60 days past due | Direct conversation with customer's AP contact, request specific payment date |
| 61-90 days past due | Escalation to customer's primary contact, written confirmation of payment plan or dispute |
| 90+ days past due | Decision point: collection action, write-off, or formal payment arrangement |
The cadence isn’t aggressive at the early stages and isn’t passive at the late stages. The escalation matches the situation. A customer at thirty days past due isn’t being harassed; they’re being asked when payment is coming. A customer at ninety days past due isn’t being indulged; they’re being asked to commit to a path forward.
What the cadence isn’t
A collection cadence isn’t a debt collection process. It’s a receivable management process for ongoing business relationships. The distinction matters:
- Receivable management: maintaining communication with current or recent customers about specific invoices, with the goal of payment and continued relationship
- Debt collection: pursuing payment from former customers or chronic non-payers, often through third-party collection agencies, with relationship preservation no longer the priority
Most small business AR sits in the receivable management category. A few situations cross over to debt collection, and those situations require different procedures (formal demand letters, collection agency engagement, small claims court, write-off decisions). The Federal Trade Commission’s guidance on commercial collections frames the legal boundaries that apply when collection moves into formal territory.
Bad debt: when to write off
A receivable becomes bad debt when collection is no longer reasonably expected. The judgment isn’t always clear, but several signals indicate the receivable should be written off:
- Customer has gone out of business or filed bankruptcy
- Customer has stopped responding to all communications for ninety-plus days
- Customer disputes the invoice and won’t engage in resolution
- Collection effort has cost more than the receivable would be worth
- The receivable has aged past the point of practical collection (varies by industry, often 120-180 days)
Writing off bad debt isn’t admission of failure; it’s accounting accuracy. A receivable that won’t be collected isn’t an asset, and reporting it as one overstates the business’s financial position. The IRS’s bad debt deduction guidance allows the write-off to reduce taxable income for businesses on accrual basis (because the income was already recognized when the receivable was created), and the write-off cleans up the aging report so management attention can focus on collectible receivables.
The AR-to-revenue ratio
Beyond the aging report, a single ratio captures collection performance: accounts receivable divided by average monthly revenue. The ratio expresses how many months of revenue are tied up in receivables. The interpretations:
- Under 1 month: very fast collection, possibly faster than customers expect
- 1 to 1.5 months: healthy for most B2B service businesses on Net 30 terms
- 1.5 to 2 months: aging is creeping; review the customer base
- 2 to 3 months: collection problem; specific customers or segments are stretching
- Over 3 months: serious collection issue; receivables may be partially uncollectible
The ratio varies by industry. Construction businesses with retainage hold receivables longer by structure. Professional services with monthly recurring engagements may sit higher than transactional services. The ratio’s value isn’t the absolute number; it’s the trend over time and the comparison to industry norms.
The customer who’s slow but reliable
A specific situation worth distinguishing: the customer who consistently pays at sixty days when terms are thirty, but always pays. The math:
- Cash flow: the receivable from that customer is always sixty days, not thirty
- Risk: the customer pays, so the receivable is collectible; the only cost is the time delay
- Relationship: aggressive collection on a reliable customer damages the relationship for no benefit
The right response isn’t aggressive collection; it’s pricing. A customer who consistently pays at sixty days is using the business as a thirty-day lender. The cost of that lending should be in the price, not absorbed by the supplier. Some businesses build the cost into pricing for known slow-payers. Others negotiate Net 60 terms explicitly with those customers and price accordingly. Both approaches recognize the underlying reality: time is cost, and the cost should land where it belongs.
What discipline at the front end looks like
Most AR problems trace back to the front end of the customer relationship: terms not specified clearly, credit not checked before extension, contracts that don’t address payment timing. The Small Business Administration’s small business resources frame credit policy as the layer that prevents collection problems rather than the layer that responds to them.
A reasonable credit policy:
- Credit terms specified explicitly on every invoice
- Credit references checked for new customers above a defined threshold
- Credit limits set per customer, with extensions requiring explicit approval
- Late fees specified in the contract or terms (and enforced consistently)
- Personal guarantees for sole proprietorships and small entities where appropriate
- Payment methods that minimize friction (ACH, credit card, online portal)
The policy doesn’t need to be elaborate. It needs to be applied consistently. A business that sets a credit policy and applies it to every customer relationship has fewer collection problems than a business that handles each customer ad hoc.
The sixty-four-day situation revisited
The nine-thousand-dollar receivable at the top of this guide can resolve in several ways. The customer’s AP delay is temporary and payment arrives within a week. The customer is genuinely struggling and a payment plan resolves it over thirty or sixty days. The customer disputes part of the invoice and resolution requires conversation about scope. Each resolution is different; each begins with a phone call that gets a real person on the other end.
The discipline that produces clean AR isn’t aggressive collection. It’s predictable cadence applied to every receivable, escalation that matches the situation, and the policy decisions made at the front end of the customer relationship rather than at the back end of the collection process. A business that runs this discipline rarely faces the credit line math, because the receivables are tracking with collection performance the business chose. A business that doesn’t faces the math more often than the customer mix would predict, because the underlying performance has drifted without anyone noticing the drift in time to correct it.
- AICPA: Receivables Management Guidance
- FTC: Commercial Collections and Consumer Protection
- SBA: Manage Your Finances