Accounts Receivable Is The Distance Between Doing The Work And Getting Paid, Which For Many Small Businesses Is Much Longer Than It Needs To Be, For Reasons That Have Nothing To Do With Their Customers
Invoices are sent out late, nobody is responsible for ensuring they actually get sent, and when they do get sent, nobody is responsible for making sure they actually get paid, certainly not before they become significantly overdue.
By contrast, invoices from suppliers are always paid on time, because the supplier actively cares that they get paid, while the customer doesn't particularly care one way or another. Essentially, companies fund their customers' working capital with their own working capital
Send the invoice the day the work finishes and send a reminder before the due date rather than after. That's it, those two changes alone move DSO more than anything else a small business can do, and neither costs money.
Most of what gets sold as collections strategy is solving for customers who won't pay, when the actual problem is customers who were never asked clearly or on time.
Ankit Sagatani, MBA, B.Com · LinkedInThis guide explains what accounts receivable management is, how to measure it, the five key areas in which it goes wrong, and what you can do to fix them within the accounting system you already use and pay for.
What is Accounts Receivable?
Accounts receivable (AR) is the money owed to a business by its customers for goods or services delivered but not yet paid for. It appears as a current asset on the balance sheet, money the business is entitled to collect. AR arises whenever a business sells on credit terms rather than requiring immediate payment.
How to Calculate AR Metrics
Days Sales Outstanding (DSO)
DSO measures how long it takes, on average, to collect payment after a sale:
DSO = (Accounts Receivable Balance / Total Credit Sales) x Number of Days
Example: AR balance of $50,000, credit sales of $300,000 for the quarter (90 days): DSO = ($50,000 / $300,000) x 90 = 15 days. A lower DSO is better, it means cash is being collected faster.
| DSO Range | Interpretation |
|---|---|
| Under 30 days | Excellent, tight credit and collections process |
| 30 to 45 days | Good, standard for Net 30 terms with reasonable collection |
| 45 to 60 days | Needs attention, some accounts are slow; review collection process |
| Over 60 days | Poor, significant collection problem; review customer credit terms and follow-up process |
AR Turnover Ratio
AR Turnover = Net Credit Sales / Average Accounts Receivable
A higher ratio means the business is collecting receivables more frequently during the period. Example: $500,000 net credit sales / $60,000 average AR = 8.33x AR turnover (collected approximately every 44 days).
The AR Process
| Step | Description |
|---|---|
| 1. Credit assessment | Before extending credit terms, assess the customer's payment history and creditworthiness |
| 2. Invoice creation | Create and send the invoice immediately after delivery, delay in invoicing directly delays payment |
| 3. Invoice delivery | Send via the customer's preferred channel (email, portal, EDI), ensure it reaches the right contact |
| 4. Payment tracking | Monitor due dates; flag invoices that have not been paid 3-5 days before due |
| 5. Collections follow-up | Send reminders at due date; escalate at 15, 30, 45 DPO |
| 6. Dispute resolution | Address any invoice disputes promptly, disputed invoices do not get paid until resolved |
| 7. Bad debt write-off | Invoices uncollectible after 90-180+ DPO may need to be written off |
AR Challenges
- Slow invoicing: invoices sent days or weeks after delivery give customers a later payment start date, compounding DSO unnecessarily
- Disputed invoices: incorrect amounts, missing PO references, or billing for unreceived goods generate disputes that pause the payment clock
- No collections process: many small businesses send one invoice and wait, with no systematic follow-up, slow payers learn there is no consequence to delaying
- Poor customer credit vetting: extending Net 30 or Net 60 terms to customers without checking their payment history creates bad debt risk
- Manual tracking: managing AR in a spreadsheet means no automated reminders, no aging reports, and no visibility into which customers are chronically slow
AR Factoring: What is it?
AR factoring is an alternative to waiting for customer payment, the business sells its outstanding invoices to a factor (a third party) at a discount in exchange for immediate cash. The factor pays 70-80% of the invoice value upfront, collects from the customer, and pays the remainder minus a fee.
Factoring is most useful when: the business has long payment cycles (Net 60+), the business needs immediate cash, and the cost of factoring (1-5% of invoice value) is less than the cost of the cash shortage it prevents.
AR vs AP: Major Differences
| Accounts Receivable (AR) | Accounts Payable (AP) | |
|---|---|---|
| What it is | Money customers owe you | Money you owe suppliers |
| Balance sheet position | Current asset | Current liability |
| Goal | Collect as fast as possible | Pay within terms, not before, not late |
| Key metric | Days Sales Outstanding (DSO) | Days Payable Outstanding (DPO) |
| Risk | Bad debt, slow cash collection | Late payment penalties, fraud, duplicate payments |
AR automation inside software you already have
You likely don't need a new platform. QuickBooks, Xero, NetSuite and Sage all include AR features that go unused in most small businesses:
- Automated invoice delivery on a schedule
- Reminder sequences before and after the due date
- Online payment links, so paying takes one click rather than a bank transfer someone has to set up
- Aging reports showing what's outstanding and for how long
- Flagging on accounts moving toward bad debt
Payment links deserve particular attention. A meaningful share of late payment is friction rather than reluctance: the invoice requires someone to log into a banking portal and key in details, so it waits for a moment that never comes. Removing that step changes collection speed more than most reminder strategies.
At roughly 20 or more customer invoices a month, turning these features on is the highest-return thing available, and it costs nothing beyond the subscription you already pay.
ERP Finance Module for AR Automation
Modern accounting and ERP platforms (QuickBooks, Xero, NetSuite, Sage) include AR automation features: automated invoice delivery, payment reminder sequences, online payment links (Stripe, Square), aging reports, and bad debt flagging. For businesses processing 20+ customer invoices per month, enabling these features within the existing accounting platform typically delivers significant DSO improvement without additional software cost.
They pull in opposite directions and both affect the same cash position. A business with a 50-day DSO and a 25-day DPO is funding its customers out of its own working capital for 25 days on every cycle. For the payables side, see our guide to managing accounts payable.
Profitjets clients see an average 18% reduction in DSO after implementing a structured AR management process, while 64% of new clients have no formal AR collections process in place when they begin working with Profitjets.
Book a free consultation and we will build the collections routine.
Frequently Asked Questions
What is a good DSO for a small business?
A good DSO is typically close to your standard payment terms, if you offer Net 30, a DSO under 35-40 days is healthy (allowing for some natural delay). If your DSO is more than 15 days above your payment terms, your collections process needs strengthening.
How do I reduce DSO?
The most effective single action: send invoices immediately after delivery (not weekly or monthly), and send an automated reminder 3 days before the due date. These two changes typically reduce DSO by 7-14 days for most small businesses. Longer-term: tighten credit terms for slow payers and offer early payment incentives (discounts) for fast payers.
What AR metrics should businesses track?
Key accounts receivable metrics include days sales outstanding (DSO), accounts receivable aging, overdue invoice value, collection effectiveness, and the percentage of invoices paid on time. Reviewing these metrics regularly helps businesses identify changes in payment behavior and potential cash-flow pressure before they become larger problems.
Can AI and automation predict which invoices are likely to be paid late?
Some modern AR platforms use analytics and machine-learning models to identify payment patterns and flag accounts that may require additional attention. This allows finance teams to prioritize collection efforts instead of treating every outstanding invoice the same way.
How does automated payment reconciliation improve accounts receivable?
Automated reconciliation can match incoming payments with the appropriate invoices and keep receivables records updated with less manual data entry. This helps businesses identify genuinely outstanding invoices more quickly and reduces the time spent matching bank transactions to customer accounts.
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