Accounts Receivable Management: Complete Guide for Indian Businesses

The Profitable Bankruptcy

Vijay’s trading business had record sales—₹10 crore in the year. His accountant confirmed: “You made ₹1.5 crore profit!”

But Vijay couldn’t pay salaries. Couldn’t pay suppliers. Couldn’t pay rent.

“How can I be profitable and broke?” he asked.

The accountant pulled up the receivables report:

• Total receivables: ₹4 crore
• Over 90 days: ₹2 crore
• Over 180 days: ₹80 lakhs
• Bad debts likely: ₹40 lakhs

Sales happened. Collections didn’t.

Vijay learned the hard way: Sales are vanity. Collections are sanity. Cash is reality.

What is Accounts Receivable?

Definition

Accounts Receivable (AR) represents money owed to a business by customers who have purchased goods or services on credit but haven’t paid yet.

AR in Financial Statements

AR vs Revenue vs Cash

Revenue - Cash Received = Increase in Receivables

AR Process Flow

Standard AR Cycle

Credit Assessment → Sale → Invoice → 
Delivery → Payment Follow-up → Collection → 
Reconciliation → Reporting

Detailed Steps

Accounting Entries

Sales Entry (Credit Sale)

Sold goods worth ₹1,00,000 + GST 18%

Customer A/c                  Dr.  1,18,000
    To Sales A/c                          1,00,000
    To Output CGST A/c                       9,000
    To Output SGST A/c                       9,000
(Being credit sale made)

Collection Entry

Received ₹1,18,000 from customer

Bank A/c                      Dr.  1,18,000
    To Customer A/c                       1,18,000
(Being payment received)

TDS Deducted by Customer

Customer paid ₹88,000 after deducting TDS ₹10,000 on ₹1,00,000 service

Bank A/c                      Dr.    88,000
TDS Receivable A/c            Dr.    10,000
    To Customer A/c                         98,000
(Being payment with TDS deducted)

Bad Debt Entry

Customer account of ₹50,000 written off as bad

Bad Debts A/c                 Dr.    50,000
    To Customer A/c                         50,000
(Being bad debt written off)

Provision for Doubtful Debts

Creating provision of ₹1,00,000 for doubtful debts

Provision for Bad Debts A/c   Dr.  1,00,000
    To Allowance for Doubtful Debts A/c  1,00,000
(Being provision created)

Sales Return Entry

Customer returned goods worth ₹20,000 + GST

Sales Return A/c              Dr.    20,000
Output CGST A/c               Dr.     1,800
Output SGST A/c               Dr.     1,800
    To Customer A/c                         23,600
(Being sales return recorded)

Credit Policy

Components of Credit Policy

Setting Credit Terms

Credit Assessment Framework (5 Cs)

Credit Limit Setting

Receivables Aging Analysis

What is Aging?

Categorizing receivables by how long they’ve been outstanding since invoice date.

Standard Aging Buckets

Aging Report Example

Aging Analysis Action

Days Sales Outstanding (DSO)

What is DSO?

Average number of days to collect payment after a sale.

Formula

DSO = (Accounts Receivable / Total Credit Sales) × 365

Example

• Accounts Receivable: ₹50 lakhs
• Annual Credit Sales: ₹3 crore
• DSO = (50/300) × 365 = 61 days

DSO Benchmarks

Industry Benchmarks

Collection Strategy

Collection Cycle

Communication Templates

Reminder 1 (Before Due Date):

Dear Customer, This is a reminder that Invoice #INV001 for ₹1,18,000 is due on [date]. Please arrange payment by the due date to avoid any inconvenience. Thank you for your business.

Reminder 3 (Overdue):

Dear Customer, Invoice #INV001 for ₹1,18,000 is now 7 days overdue. Please arrange immediate payment to avoid service disruption. If already paid, kindly share payment details for our records.

Final Notice:

Dear Customer, Despite multiple reminders, Invoice #INV001 remains unpaid. This is a final notice before we initiate legal proceedings. Please clear the dues within 7 days.

Collection Best Practices

Dealing with Disputes

Common Dispute Types

Dispute Resolution Process

Customer raises dispute → 
Log in system → 
Investigate with evidence → 
Internal discussion → 
Resolution offer → 
Customer acceptance → 
Adjustment entry → 
Close dispute

Dispute Accounting

Credit note for quality issue ₹10,000 + GST:

Sales Return A/c              Dr.    10,000
Output CGST A/c               Dr.       900
Output SGST A/c               Dr.       900
    To Customer A/c                         11,800
(Being credit note for quality issue)

Provision for Bad Debts

Methods of Provisioning

Aging-Based Provision

ECL Under Ind AS 109

For trade receivables, a simplified approach uses provision matrix:

AR Financing Options

Factoring

Selling receivables to a factor at a discount.

Invoice Discounting

Borrowing against receivables.

Channel Financing

Financing for dealer/distributor network.

AR Automation

Benefits

Technology Solutions

Key Features

Internal Controls

Key Controls

Approval Matrix

KPIs and Reporting

Key Metrics

Standard Reports

Common AR Mistakes

Mistake 1: No Credit Policy

Problem: Sales gives unlimited credit Result: High bad debts Solution: Documented credit policy with limits

Mistake 2: Poor Invoicing

Problem: Delayed/incorrect invoices Result: Delayed payments, disputes Solution: Invoice same day, verify details

Mistake 3: Inconsistent Follow-up

Problem: No systematic reminders Result: Customers delay payment Solution: Automated reminder system

Mistake 4: Ignoring Small Balances

Problem: Focus only on large accounts Result: Small amounts never collected Solution: Include all in collection process

Mistake 5: Late Provisioning

Problem: Don’t provision until write-off Result: Overstated assets Solution: Regular aging-based provisioning

Disclaimer

This guide is for educational purposes. Accounts receivable practices should follow your organization’s policies and applicable regulations. Consult qualified professionals for specific situations.

Summary

Accounts Receivable management essentials:

1. Credit Policy: Set before selling on credit
2. Invoicing: Accurate, timely, compliant
3. Collection: Systematic, consistent follow-up
4. Aging Analysis: Weekly review, act on overdue
5. Provisioning: Regular, realistic provisions
6. DSO: Monitor and benchmark

Remember: Sales are vanity, collections are sanity, cash is reality.

Social Media Posts

LinkedIn: “₹10 crore sales. ₹1.5 crore profit. Yet couldn’t pay salaries.

Why? ₹4 crore stuck in receivables. ₹80 lakhs doubtful.

This is the reality many businesses face.

AR Management essentials: • Set credit limits BEFORE selling • Invoice on day of delivery • Systematic follow-up (Day 20, 30, 45, 60…) • Weekly aging review • Stop supplies to chronic defaulters

The best sale is a collected sale.

What’s your DSO? If it’s > 60 days, you have a problem.

#AccountsReceivable #CashFlow #BusinessFinance”

Twitter/X: “AR Management Rule of 3:

Before due date: 3 reminders After due date: 3 escalations No response: 3 actions (hold orders, legal notice, collection)

A sale isn’t complete until the cash is in the bank.

Your DSO target: < 45 days Bad debt target: < 1% of sales

#CashFlow #BusinessTips”

Instagram: “WHY profitable businesses go broke 😱

Sales: ₹10 crore ✅ Profit: ₹1.5 crore ✅ Cash in bank: ₹0 ❌

Where’s the money? Stuck in RECEIVABLES!

THE PROBLEM: 🔴 Sold on credit without limits 🔴 No follow-up on payments 🔴 Customers aged past 90 days 🔴 Became bad debts

THE SOLUTION: ✅ Credit policy before selling ✅ Systematic reminders ✅ Weekly aging review ✅ Stop supply to defaulters

REMEMBER: Sales are vanity Collections are sanity Cash is reality 💰

#AccountsReceivable #CashFlowTips”