Accounts Receivable Outsourcing: Improve Cash Flow Without Adding Staff

Key Takeaways

• AR outsourcing can reduce DSO (days sales outstanding) by 20-30%
• Typical cost: $12,000-$30,000/year for SMEs with full AR services
• For S-Corps and partnerships, revenue timing affects tax liability
• AR outsourcing includes invoicing, collections, and payment application
• Cash flow improvement often pays for the service cost

Your invoices go out. Payment comes in… eventually. Sometimes 45 days. Sometimes 60. Sometimes you’re chasing customers for money they owe while your own bills stack up.

Accounts receivable outsourcing can fix the cash flow problem without hiring in-house staff. But like any business decision, it works better for some situations than others.

This guide covers what AR outsourcing includes, what it costs, and when it makes sense. For S-Corps and partnerships, we’ll also explain something most AR content ignores: how revenue recognition timing affects your tax liability.

What Is Accounts Receivable Outsourcing?

Accounts receivable outsourcing means hiring a specialized provider to manage your invoicing and collections process. This includes sending invoices, tracking payments, following up on past-due accounts, and applying cash when it arrives.

The goal is simple: get paid faster without dedicating your time (or hiring someone) to chase money.

For S-Corps and partnerships, there’s an additional consideration. When revenue is “recognized” for tax purposes depends on your accounting method and when invoices are issued. A tax-aware AR provider understands these implications. A generic invoicing service doesn’t.

If your business already uses outsourced accounting services, AR is typically included. If you’re handling accounting yourself but struggling with collections, standalone AR outsourcing might be the right fit.

Benefits of AR Outsourcing

Improved Cash Flow

This is the primary reason businesses outsource AR. Companies that use professional AR management typically see a 20-30% reduction in DSO within the first few months.

DSO (days sales outstanding) measures how long it takes to collect payment after you invoice. If your DSO is 60 days and you reduce it to 45 days, you’re collecting cash two weeks faster. For a business doing $1 million in annual sales, that’s roughly $41,000 in working capital freed up.

Consistent, professional follow-up is the key. In-house AR often falls to the bottom of the priority list. Outsourced AR makes collections the primary focus.

Cost Savings

Full-time AR staff costs $45,000-$65,000 in salary alone. Add benefits, payroll taxes, and management overhead, and you’re looking at $60,000-$85,000 annually.

Outsourced AR for a small to mid-sized business typically runs $12,000-$30,000 per year. Even at the high end, that’s significant savings.

Beyond direct costs, you also reduce bad debt write-offs. Professional collections recover more of what’s owed before accounts become uncollectible.

Access to Expertise

Good AR isn’t just about sending invoices. It requires:

• Collections diplomacy: Getting paid without damaging customer relationships
• Dispute resolution: Handling billing questions efficiently
• Credit risk assessment: Knowing when to extend terms and when to require prepayment

These skills take years to develop. Outsourcing gives you access to experienced AR professionals without building the expertise in-house.

Scalability

Business growing? Invoice volume increasing? Outsourced AR scales with you. No emergency hiring when you land a big client. No training delays when staff turns over.

This matters especially for businesses with seasonal revenue patterns. You pay for what you use rather than staffing for peak periods.

What AR Outsourcing Services Include

Invoicing

Professional invoice generation and delivery:

• Electronic invoicing (email, customer portals)
• Paper invoicing for customers who require it
• Recurring invoicing for subscription or retainer businesses
• Custom invoice formats matching your branding

The key is accuracy and timeliness. Invoices with errors slow down payment. Delayed invoices extend your cash cycle.

Payment Processing

Once customers pay, someone needs to apply that cash correctly:

• Payment application and reconciliation
• Multiple payment method handling (ACH, credit card, check)
• Deposit reconciliation
• Customer credit balance management

Clean payment application prevents confusion about who owes what.

Collections

This is where the real value shows up:

• Aging report monitoring
• Collection calls and emails (professional, not aggressive)
• Escalation protocols for seriously delinquent accounts
• Payment plan arrangements when appropriate

Good collections balance persistence with relationship preservation. You want the money, but you don’t want to alienate customers you’ll work with again.

Reporting

Visibility into your AR position:

• AR aging analysis
• Customer payment pattern tracking
• Cash flow projections based on expected collections
• Exception reports for accounts needing attention

Reporting turns AR from a mystery into a planning tool.

The Tax Angle: Revenue Recognition for S-Corps and Partnerships

Here’s what generic AR content misses: for pass-through entities, the timing of your revenue recognition directly affects your tax liability.

Cash vs. Accrual Method

If you use cash-basis accounting, revenue is recognized when payment is received, not when you invoice. If you use accrual, revenue is recognized when you invoice (or when you’ve performed the work), regardless of payment timing.

Most small S-Corps and partnerships use cash basis because it’s simpler. But understanding the distinction matters for year-end planning.

Year-End Invoice Timing

For cash-basis businesses: invoices sent in late December may not be paid until January. The revenue appears in the next tax year. This can be used strategically.

For accrual-basis businesses: when you invoice affects which year includes the revenue. Delaying December invoices to January 2 (if you can) defers income.

A tax-aware AR provider understands these distinctions and can coordinate with your tax planning.

Partnership Income Allocations

For partnerships, revenue timing affects partner income allocations. If your partnership agreement allocates income based on when it’s earned, the timing of invoicing and payment can shift income between partners in different tax situations.

This is one reason why your AR function should connect to your partnership taxation strategy, not operate in isolation.

S-Corp Considerations

For S-Corps, revenue timing affects distributions and shareholder basis. Higher revenue in a given year may change your distribution strategy. Your AR approach should coordinate with your overall S-Corp tax planning.

AR Outsourcing Costs

Pricing varies based on business size and invoice volume:

Pricing models vary:

• Per invoice: $3-$8 per invoice processed
• Monthly retainer: Flat fee for defined scope
• Percentage of collections: Common for collection-focused engagements (typically 10-25% of collected amounts)

For comprehensive outsourced accounting pricing, including AR, AP, and bookkeeping, see our outsourced accounting cost guide.

Signs You Need AR Outsourcing

Consider outsourcing AR if:

Your DSO exceeds industry averages. If you’re taking 60 days to collect while competitors collect in 35, you have an AR problem.

Bad debt write-offs are increasing. Rising write-offs mean accounts are slipping through the cracks. Professional AR catches problems earlier.

Customers complain about invoice errors. Inaccurate invoices slow payment and frustrate customers. Outsourcing often improves accuracy.

Staff is spending too much time on collections. If your operations people or (worse) your salespeople are chasing receivables, they’re not doing their actual jobs.

Cash flow is unpredictable. If you can’t forecast when money will arrive, you can’t plan. Professional AR improves predictability.

When to Keep AR In-House

AR outsourcing isn’t right for everyone:

Very few customers. If you invoice 15-20 customers monthly and have strong relationships with all of them, outsourcing may add unnecessary overhead.

Highly relationship-sensitive collections. Some industries require extremely delicate customer handling. If your collections approach is deeply tied to your sales relationship, in-house may be better.

Same-day invoicing requirements. If you need invoices generated immediately after service delivery (same hour, same day), an outsourced workflow may not be fast enough.

B2B Consideration: Exemption Certificate Management

If you sell to other businesses, some of your customers don’t owe sales tax because they’re resellers or have exemption certificates.

Managing those certificates is part of the AR function:

• Collecting valid exemption certificates before the first invoice
• Tracking certificate expiration dates
• Validating that certificates cover what’s being purchased
• Maintaining documentation for audit protection

Improper exemption certificate management can trigger sales tax liability on transactions you thought were exempt. This is an AR responsibility many businesses overlook.

Frequently Asked Questions

Will outsourced collections damage customer relationships?

Professional AR providers prioritize relationship preservation. Collections are diplomatic, not aggressive. Most customers actually prefer clear, professional communication over awkward calls from your internal staff. The key is consistency and professionalism.

How does AR outsourcing integrate with my invoicing system?

Good providers integrate with QuickBooks, Xero, and most accounting platforms. Invoices can be generated from your system or theirs, depending on your preference. Data flows both ways so your books stay current.

What happens with disputed invoices?

Your provider investigates, communicates with the customer, and works toward resolution. Disputes are escalated to you only when necessary. You stay informed but don’t have to handle every conversation.

Accelerate Cash Flow with Expert AR Support

AR outsourcing improves collections without adding headcount. The cash flow improvement alone often covers the cost.

For S-Corps and partnerships, tax-aware AR considers revenue recognition timing, not just invoice processing. That connection between operations and tax strategy is what separates professional accounting support from generic invoicing services.

If your DSO is climbing, write-offs are increasing, or you’re just tired of chasing payments, it’s worth exploring what outsourced AR could do for your business.

Ready to improve your collections process? Schedule an Operations Assessment to discuss your situation. You can also learn about accounts payable outsourcing for a complete back-office solution.