What is Accounts Receivable?
Accounts receivable (AR) is money owed to you by customers who have received your product or service but haven't paid yet. It's an asset on your balance sheet representing future cash inflows.
When you invoice a customer with payment terms (Net 30, Net 60), the amount becomes accounts receivable until they pay.
Why AR Management Matters
AR is cash you've earned but don't have yet. High AR means cash is tied up waiting for payment. Poor AR collection can create cash flow problems even for profitable companies.
Days Sales Outstanding (DSO) measures how quickly you collect. Lower DSO means faster cash conversion. High or increasing DSO signals collection problems.
Managing Accounts Receivable
Invoice promptly. Offer early payment discounts. Follow up on overdue invoices systematically. Consider invoice factoring for immediate cash. Set credit limits for risky customers.
Formula
Days Sales Outstanding (DSO) = (Accounts Receivable ÷ Revenue) × Days in Period
AR Turnover = Revenue ÷ Average Accounts Receivable
Example
Your SaaS company tracks receivables aging:
- 0-30 days: $50,000
- 31-60 days: $20,000
- 61-90 days: $10,000
- 90+ days: $5,000
Total AR: $85,000
DSO = ($85,000 ÷ $300,000 monthly revenue) × 30 = 8.5 days
Most customers pay within 30 days. The $5K over 90 days may need collection efforts.