Understanding Accounts Receivable and How It Works

If you've ever extended services or products on credit and faced delays in payment, you're familiar with the challenges of accounts receivable (AR). Efficient AR management is crucial for maintaining healthy cash flow and ensuring business sustainability.

Cash flow issues are a leading cause of business failures. A study by U.S. Bank revealed that 82% of business failures result from cash flow problems. In the healthcare sector, the situation is particularly concerning. According to a survey, Americans owe at least $220 billion in medical debt, underscoring the financial strain on both providers and patients. 

Understanding how accounts receivable works is the first step to optimizing financial operations. In this guide, we’ll break down what AR is, how it functions, the common challenges businesses face, and the best practices for ensuring timely payments.

What is Accounts Receivable?

Accounts receivable (AR) is the money a business is owed for goods or services provided on credit. It represents short-term assets on a company's balance sheet and is essential for maintaining cash flow.

For example, when a healthcare provider bills a patient or insurance company, the unpaid balance is recorded as AR until payment is received. Businesses across industries issue invoices with payment terms like Net 30 or Net 60 days, expecting payment within that timeframe.

Efficient AR management ensures timely payments and reduces the risk of bad debt. Without it, businesses may face cash flow issues, delayed operations, and financial strain. 

Now that we've defined accounts receivable, let’s take a closer look at how the AR process operates in healthcare, where accurate management is crucial for timely payments and financial stability

How Accounts Receivable Works in Healthcare

Below is an overview of the key stages in the AR process, illustrating how each step contributes to improving cash flow and optimizing revenue cycles.

1. Establish Credit Terms

Before providing services, healthcare providers must decide whether to extend credit to patients based on insurance verification and their financial standing.

Clearly defined payment terms should be communicated to patients and insurance companies upfront to avoid confusion and prevent claims from being denied.

2. Collect Information for Invoicing

Accurate invoicing starts with collecting the correct details about the services provided, patient information, and insurance coverage. Missing or incorrect information is a major contributor to claim denials and payment delays.

Tip: Implement a comprehensive checklist to ensure all necessary data is collected before sending invoices.

3. Send Invoices to Patients

Once services are rendered, it's time to send invoices to either the patient or insurance companies. The invoice should clearly detail the charges for services, insurance coverage, and any remaining balance due from the patient.

Tip: Offer multiple payment options and use clear, concise language in invoices to improve patient understanding and payment speed.

4. Follow up and Track Payments

After sending invoices, it's critical to track the status of each payment, whether from patients or insurers. Regular follow-up ensures that overdue payments are identified early, preventing delayed collections.

Tip: Use automated reminders for patients to pay and follow up with insurance providers on pending claims.

5. Reporting and Analysis

Monitoring key AR metrics, like Days in Accounts Receivable (DAR) and aging reports, provides insight into the health of your accounts receivable process. It helps healthcare providers identify potential issues early and adjust their strategies accordingly.

Tip: Use real-time reporting tools to track overdue accounts and adjust strategies accordingly.

Now that we’ve outlined the steps in the AR process, let’s address some common challenges healthcare providers face and discuss practical solutions.

Challenges in Accounts Receivable Management

While effective AR management can streamline cash flow, there are several challenges that healthcare providers face in maintaining a smooth revenue cycle. Let’s explore some of these challenges:

1. Outdated Processes 

Many organizations continue to use manual, paper-based billing methods or disconnected legacy systems, which increase the likelihood of errors. These errors not only delay payments but also impact cash flow management and operational efficiency.

According to recent studies, 49% of global businesses report spending over 5 days each month just to process invoices, highlighting the inefficiencies of manual invoicing systems.

How to Fix It:

• Adopt AR Automation: Automating invoice generation, payment processing, and cash application can significantly reduce human error, improve accuracy, and accelerate collections.
• Integrate Systems: Seamless integration between AR, accounting, and customer management systems ensures real-time data access and smooth communication, minimizing errors and improving efficiency.

2. Lack of Collaboration and Communication

Employee burnout in accounts receivable (AR) departments is often linked to an increase in overdue accounts. When AR teams are overburdened with manual tasks, such as payment processing and follow-ups, overtime hours increase, which can lead to delays in managing overdue accounts.

How to Fix It:

• Outsource Routine AR Tasks: Reducing the workload on AR teams by outsourcing invoicing and payment follow-ups helps prevent burnout and allows teams to focus on more strategic activities.
• Automate AR Functions: Automating tasks like invoicing and payment reconciliation reduces manual effort, minimizing the risk of burnout and improving overall efficiency.

The above chart demonstrates how overtime hours (blue) rise as overdue accounts (red) increase over a 10-month period. The correlation shows that as burnout increases, overdue accounts also accumulate, highlighting the need for solutions like outsourcing and automation to alleviate the strain on AR teams.

3. Insufficient Resources Leading to Employee Burnout

Many businesses struggle with understaffed AR teams, especially with the increasing complexity of managing multiple clients and payment terms. This often leads to overburdened employees, who have less time to focus on high-priority tasks like forecasting, dispute resolution, and cash flow management.

How to Fix It:

• Leverage AR Outsourcing: Instead of relying on internal teams to manage everything, companies can partner with professional AR management services to handle routine tasks like invoicing, payment reminders, and reconciliations. This allows in-house staff to focus on more strategic work, such as improving client relationships and forecasting.
• Optimize AR Processes with Technology: Implement technology solutions that help AR teams handle high-volume tasks efficiently. 

Example:

A technology company faced high turnover in its AR department due to heavy workloads. By outsourcing billing and payment follow-ups to an external AR partner, the company was able to reduce employee burnout and increase collections by 20%. 

How South East Client Services (SECS) Helps Manage Accounts Receivable Efficiently

Managing accounts receivable (AR) can be complex, especially in healthcare, where payments rely on insurance claims and patient billing. South East Client Services (SECS) helps businesses streamline AR management with a structured and compliant approach.

• Claim Management & Insurance Follow-Ups – SECS reduces delays by ensuring accurate claim submissions and resubmitting denied claims promptly.
• Digital-First Communication – Engages patients through email and text reminders, reducing overdue accounts.
• Flexible Payment Plans – Offers customized payment options to help patients manage outstanding balances.
• Compliance-Driven Collections – Adheres to FDCPA and HIPAA regulations, ensuring ethical and professional debt recovery.

Conclusion

Managing accounts receivable effectively is key to sustaining cash flow and reducing financial risk. Late payments and outstanding balances can create operational challenges, making a structured AR process essential.

South East Client Services (SECS) specializes in tailored accounts receivable solutions, helping businesses streamline collections while maintaining compliance. With deep industry expertise and a structured approach, SECS ensures faster, more effective receivables management. 

Reach out today to learn how SECS can support your AR needs.