SOP for Accounts Receivable: PKC’s Complete Guide

SOP for accounts receivable ensures consistency, accuracy, and efficiency in managing incoming payments and is crucial for all businesses. 

In this guide, we help break down the basics of SOP for AR processes. We also share the process of creating an efficient SOP and a sample you can use as a reference. 

Understanding SOP for Accounts Receivable

SOP for accounts receivable is a step-by-step guide that explains how a company manages money owed to it by its customers.

 It ensures consistency, accuracy, compliance, and efficiency in collecting payments for goods or services sold on credit.

Example:

If you run a software company and send an invoice to a client for ₹40,000, your SOP will guide your employees on:

• When to send the invoice
• How to follow up for payment after 30 days
• How to handle GST and TDS
• What to do if the client doesn’t pay after 60 days

Importance of Accounts Receivable SOP for Businesses

Creating and implementing an SOP can bring the following benefits: 

• Ensures Compliance:  Ensures AR processes are aligned with applicable laws like GST, TDS, Contract Act, and IBC, keeping the company compliant and audit-ready.
• Improves Cash Flow: Standardizes invoicing and follow-ups, ensuring faster collections and reducing overdue payments. This improves cash flow visibility.
• Mitigates Financial Risks: Enforce credit checks, approval limits, and timely provisioning for bad debts. They also introduce internal controls to prevent fraud.
• Operational Efficiency: Reduce manual errors, rework, and delays. This improves staff productivity, shortens cycle times, and cuts administrative costs.
• Strengthens Customer Relationships:  Ensure accurate billing and consistent communication with customers that builds trust, and leads to fewer payment disputes.
• Consistency & Scalability: Make sure that AR tasks are executed uniformly, regardless of who performs them. This supports smooth scaling with growing transaction volumes.

Key Components of an AR SOP in India 

An accounts receivable SOP typically consists of the following elements:

Credit Approval & Terms:

• Define criteria for granting credit 
• Clearly state payment terms, credit limits, and interest on late payments

GST Compliant Invoicing :

• Generate GST-compliant invoices/e-invoices 
• Issue invoices immediately upon shipment/service completion
• Ensure prices, quantities, taxes, and PO references match

Recording & Accounting:

• Post invoices accurately in the accounting system (ERP/Tally) against the correct customer account.
• Classify income correctly 
• Record advances received separately

Payment Receipt & Application:

• Define channels of payment – Cheque, NEFT/RTGS/IMPS, UPI, Payment Gateways
• Match incoming payments to specific invoices in the system daily/weekly
• Regularly reconcile bank statements with the AR ledger
• Record tax components correctly on advances and final payments

Collections & Follow-Up:

• Regularly generate aging reports categorizing debts by age 
• Define escalation steps:
  • Friendly reminders (Email/SMS) before the due date.
  • Formal reminders/statements after the due date.
  • Phone calls & escalation to sales/management.
  • Legal notices for severely overdue accounts.
• Have a dispute resolution process for handling customer queries/disputes promptly.

Reconciliation & Reporting:

• Send periodic customer statements for confirmation.
• Reconcile individual customer ledgers regularly.
• Reconcile sales data in books with GST and input credit claims 
• Key Reports: Aging Summary, Collection Efficiency (DSO), Bad Debt Provision, Customer-wise Outstanding.

Bad Debt Management:

• Define criteria and process for identifying doubtful debts
• Calculate and record provisions as per accounting standards 
• Process for writing off irrecoverable debts with proper approvals

Compliance & Controls:

• Ensure AR data feeds accurately into GSTR-1 
• Deduct TDS (if applicable per Income Tax Act) and issue Form 16A.
• Separate roles for invoicing, cash handling, reconciliation, and collections.
• Maintain invoices, delivery challans, payment proofs, and communication as per statutory periods. 

How to Create an SOP for Accounts Receivable in India?

Here’s a simple step-by-step procedure for creating an SOP for AR processes: 

Step 1: Define the Purpose

Clearly state why the SOP exists.

Example:
Ensure timely customer collections, minimize bad debts, and comply with applicable Indian laws, including GST and TDS regulations.

Step 2: Define Scope and Responsibilities

Identify the processes and teams covered by the SOP. Also, outline who is responsible for each task

Example:

• AR Executive: Generates invoices, follows up on payments
• Finance Manager: Approves credit terms, reviews AR reports
• Sales Team: Confirms deliveries and customer details

Step 3: Describe the AR Process (Step-by-Step)

Customer Onboarding

• Collect KYC and GST details
• Set and approve credit limits

Invoice Generation

• Create GST-compliant invoices using software like Tally or Zoho.
  Ensure correct GSTIN and HSN/SAC codes are included

Invoice Distribution

• Send invoices to customers within 24 hours of delivery
• Attach proof of delivery if required

Payment Follow-up

• Send reminders at 15, 30, and 45-day intervals
• Use email, phone, or WhatsApp as needed

Payment Receipt and Recording

• Match payments with corresponding invoices
• Record in the ERP system
• Reconcile with bank statements

TDS and GST Compliance

• Collect TDS certificates (Form 16A)
• File GST returns accurately and on time

Overdue Payment Management

• Generate AR aging reports
• Escalate invoices overdue by 60 or 90 days
• Initiate legal action if necessary

Step 4: Comply with Indian Legal and Tax Regulations

Ensure adherence to key regulations, including:

• GST laws (invoice format, applicable rates, timely return filing)
• TDS rules (deduction, certificate issuance)
• Companies Act (accurate financial reporting)

Step 5: Provide Templates and Formats

Include ready-to-use templates to support consistency:

• GST-compliant sales invoice
• Payment reminder emails
• TDS reconciliation format
• AR aging report format

Step 6: Define Key Performance Indicators (KPIs)

Monitor these KPIs regularly to track AR performance:

Step 7: Schedule SOP Reviews

Specify how often the SOP will be reviewed and updated.

Example:
This SOP will be reviewed and updated every six months by the Finance Manager.

Sample SOP for Accounts Receivable Process in India  

The SOP for AR will differ from 

 can vary with the nature and size of your industry. Here’s a FREE sample SOP for Accounts Payable: 

Challenges in Implementing SOP for Accounts Receivable

Implementing an Accounts Receivable SOP, while crucial, faces several unique and common challenges such as:

Resistance to Change & Cultural Mindset:

Employees are accustomed to informal methods and may resist structured processes. Plus, managers may see SOPs as bureaucratic overhead.

Solution: Secure strong leadership buy-in, communicate benefits clearly, and involve teams in SOP development for ownership.

Complex & Dynamic Regulatory Environment:

Frequent GST/TDS updates and complex rules make SOPs outdated quickly and hard to maintain accurately.

Solution: Assign a dedicated compliance owner to review and update the SOP quarterly and after major regulatory announcements.

Lack of Standardization & Poor Data Quality:

Inconsistent processes and inaccurate/incomplete master data (customer info, credit limits).

Solution: Conduct a master data cleanup and validation project before SOP rollout and enforce strict data entry standards.

Technology & Integration Gaps:

Basic software/disconnected systems lack automation, forcing manual work and increasing errors.

Solution: Invest in integrated ERP/AR automation tools with compliance features or use help from service providers like PKC Management Consulting.

Skill Gaps & Training Needs:

Staff lack understanding of GST, credit risk, legal recovery, or system usage; ongoing training is resource-heavy.

Solution: Implement mandatory, role-specific training programs during rollout and schedule regular refreshers on SOPs and regulations.

Enforcing Credit Policies & Collections Rigor:

Sales pressure to bypass credit checks; hesitancy to enforce terms/fees; difficulty defining clear escalations..

Solution: Establish joint Sales-Finance accountability for credit decisions and embed clear, automated escalation triggers in the SOP.

Managing Exceptions & Disputes:

Defining efficient SOP paths for non-standard situations and common disputes is complex.

Solution: Define a clear exception/dispute resolution workflow within the SOP, including timelines, authority limits, and documentation steps.

How Can PKC Help With SOPs for AR Processes?

✅Map complex workflows for seamless cross-department collaboration

✅Industry-specific AR SOP templates accelerating implementation

✅Seamless ERP integration for automated AR workflows

✅Real-time AR dashboards identifying cash flow leaks

✅End-to-end process mapping with audit-ready controls

✅Dedicated SOP champions ensuring adoption success

✅Continuous SOP updates for dynamic regulations

✅Role-based AR training boosts team proficiency

✅Post-implementation audits guarantee SOP effectiveness

Frequently Asked Questions

1. Why is an SOP important for managing receivables?

It keeps your AR process organized, reduces confusion, and helps improve cash flow. It also ensures legal and tax compliance, which is vital in India.

2. What should be included in an AR SOP?

It should include invoice creation, payment follow-up, receipt tracking, overdue handling, and tax compliance steps. Also include templates and KPIs to monitor the process.

3. How often should the SOP be reviewed?

It should be reviewed every 6 to 12 months. This ensures the process remains aligned with legal and operational changes.

4. What KPIs should we track for AR?

Track Days Sales Outstanding (DSO), overdue percentage, and collection efficiency. These KPIs help measure the health of your receivables.