The seven stages behind every receivable, and the test that catches gaps

The receivables function fails in one of two ways: money is owed that nobody is chasing, or money is being chased that is not owed. Both come from the same cause, a stage in the cycle with no document and no owner.

The framework below is the cycle, cut into seven stages. For each stage, four questions have to be answerable: what triggers it, what document proves it, what entry it makes, and who owns it. A business that can fill in every cell has a receivables function. A business that cannot has a pile of invoices.

What to take away

The seven stages

The entries column is short on purpose. Only three stages touch the ledger. The rest are controls, and the framework's value is in making them visible.

Stage 1: the decision to lend

Every invoice on terms is a loan. That is not a metaphor: a business that grants terms, sets limits and chases balances is doing consumer or trade credit. The federal guidance for businesses on credit and finance is the place to check what obligations come with it in your case.

Stage 1 is where the business decides how much it will lend to this customer and for how long. The document is a terms sheet the customer has seen: payment period, what happens on late payment, whether a deposit is required.

Set a limit, however rough. The limit is not a forecast of what the customer will do; it is a trigger for a conversation. When the balance reaches it, the next order waits until someone with authority has looked.

What goes wrong without this stage: the third unpaid invoice is raised to a customer who has never paid the first, because nobody was looking at the balance when the order came in.

Stage 2: the invoice

The trigger is delivery, not the end of the month and not the day someone remembers. The entry is the sale: receivable up, income up, dated when the work was done. That dating rule, and what it does to the period the sale lands in, is the subject of the revenue recording guide.

The invoice's job is to be payable on receipt, meaning it carries everything the customer's process needs: their order reference, the correct legal entity, the terms, the bank details, an itemisation that matches what they think they bought. Ask each new customer once what their accounts department needs, and store the answer on the customer record.

What goes wrong: an invoice that is correct in every respect except the missing purchase order number, which then waits a full payment cycle while someone on the other side works out who ordered it.

Stage 3: the statement

A statement is a list of open invoices sent to the customer on a fixed day each month. It makes no entry. Its purpose is to surface disagreements early: the invoice they never received, the payment they think they made, the credit they believe they are owed.

Businesses skip this stage because it seems like admin. It is the cheapest control in the cycle, because it puts the customer's own bookkeeper to work checking your ledger.

Stage 4: receipt and allocation

Money arrives; bank up, receivable down. The discipline is allocation: the receipt is matched to specific invoices, using the remittance advice if there is one and a question to the customer if there is not. Never a lump against the customer.

Short payments and overpayments are noted at this stage and passed to stage 5 or 7. They are not written off here, because the bookkeeper allocating cash is not the person who can decide whether a deduction was justified.

Stage 5: query and dispute

A disputed invoice is not late. It is unresolved, and chasing it as if it were late only annoys the customer.

The dispute log records the customer's objection, the owner of the answer on your side, and the date. The invoice stays open on the ledger, flagged, and leaves the chasing routine until the dispute closes.

The owner of a dispute is whoever did the work, because the question is nearly always about the work.

Stage 6: chase and escalate

One named person, a fixed schedule, and a contact log that records what was said and when. The aged report drives it, sorted by age. The escalation ladder itself, rung by rung, is set out in the accounts receivable overview and is not repeated here.

The framework point is narrower: chasing makes no entry and changes no balance. If a business finds it is spending most of its receivables effort here, the effort is being spent on the symptom.

Stage 7: resolve

At some point somebody decides that part of a balance will not be collected, or should never have been billed. Two different documents, two different entries.

Neither decision belongs to the bookkeeper, and both need written approval from someone authorized to give money away, filed with the entry.

Whether a written-off balance is deductible, and on what basis, is a separate question again. Start from the federal guidance on business expenses and confirm it with your own accountant, rather than assuming the ledger entry settles it.

The one test: control account to customer ledger

Every customer balance, added up, must equal the receivables figure in the general ledger, every month end, exactly. This is the only mechanical test the framework has, and it catches almost everything.

If the two disagree, something reached one of them without going through the other: a journal posted straight to the control account, a receipt posted to income, or an invoice entered outside the sales process. Find it before closing the month.

How the control account is set up so this test is possible is a chart of accounts question. The monthly routine it belongs to is described in the bookkeeping foundations guide.

Filling in the blanks

Take the table at the top and write your own business into it. The exercise takes half an hour. What it usually shows:

Each blank cell is a specific job. Any package worth using can hold the documents in the table; what it needs to do with them is covered in the guide to accounting software.

Common questions