Accounts receivable management (ARM) practices can make or break any business. It may sound like a strong statement, but over and over it proves to be true.

Businesses that have effective ARM policies and practices usually have a much healthier bottom line, and thus have a much better survival rate in today's competitive market.

What exactly is an account receivable? This occurs when a business accepts, from its customers, a promise that rather than paying for goods or services when they are provided, these customers will pay sometime in the future. In other words, a company provides credit to its customers. Few businesses provide goods or services and then are immediately paid by the customer. Consequently, most businesses offer some sort of credit. Effective ARM practices demand that companies develop comprehensive policies that deal with each of the stages of the accounts receivable process. There are some rules of thumb that should be regarded when creating such policies:

Start by addressing the issue of to what degree the company is able to finance credit; this will assist in determining a lot of the other parameters of any policies;

In developing these policies, management must address such issues as sales volume, cash management, the actual costs of accounts receivable policies and ultimately the impact, if any, on client relationships;

Involve members from the management team, ensuring there is fair representation from all departments;

Identify the industry norms for credit and determine the policies of the competition (there's no point in developing policies that will make you lose your competitive edge);

Be realistic in the sustainability of policies; modify where necessary and account for any new systems that may be required to implement these policies (i.e., a computerized accounting system);

Ensure the issues of late or non-payments are addressed specifically in the ARM policies;

Develop formulas for client credit ratings and corresponding credit policies;

Determine the feasibility and usefulness of developing a sliding scale of credit rate approval at different management levels;

Develop and include in policies clear 'triggers' for the various stages of the accounts receivable processes; and

Establish a clear timetable for reviewing ARM policies (annual reviews are recommended).


Accounts receivable frequently represents a large portion of a company's assets and therefore should be given careful attention. By being proactive, companies can reduce any negative fiscal impacts resulting from client credit issues.

Copyright - Kelly Melanson, Certified Management Accountant