Accounts receivable is the money your clients owe you. Managing it well is the difference between a cash-flush business and one that's constantly scrambling. Here's how to do it right.
What Is Accounts Receivable?
Accounts receivable (AR) refers to the money owed to your business by customers who have received goods or services but haven't paid yet. It appears on your balance sheet as a current asset — because it represents money you're entitled to receive, typically within a year.
When you issue an invoice, you create an accounts receivable entry. When the client pays, that entry is cleared.
For most small businesses, accounts receivable is one of the largest items on the balance sheet — and one of the most poorly managed.
Why Accounts Receivable Management Matters
Having $50,000 in accounts receivable sounds great. But if $30,000 of it is 60+ days overdue and unlikely to be collected, your real financial position is very different from what the books show.
Poor AR management leads to:
Key Accounts Receivable Metrics
Days Sales Outstanding (DSO)
(Total Accounts Receivable ÷ Total Credit Sales) × Number of DaysDSO tells you how many days, on average, it takes you to collect payment. A DSO of 35 means you're collecting in about 5 weeks from invoice date.
Compare your DSO to your stated payment terms: if your terms are Net 30 and your DSO is 52, something is wrong.
Accounts Receivable Turnover
Net Credit Sales ÷ Average Accounts ReceivableHow many times you collect your full receivables balance in a period. Higher is better. A low turnover ratio signals collection problems.
Ageing Report
A breakdown of your receivables by how long they've been outstanding: 0-30 days, 31-60, 61-90, 90+. The older the receivable, the less likely it is to be collected.
Best Practices for Managing Accounts Receivable
1. Invoice Immediately
The clock doesn't start until the invoice is sent. Invoice on the day work is delivered, every time.
2. Verify Client Information Before Starting Work
A wrong billing address or missing purchase order number can delay payment by weeks on the client's side. Get all billing information upfront.
3. Use Short, Clear Payment Terms
Net 30 is the standard, but Net 14 or even Net 7 is better for your cash flow and often acceptable to clients who simply haven't thought about it. Always include a specific due date — "Due 15 June 2025" is clearer than "Net 30."
4. Offer Multiple Payment Methods
Every additional friction point in the payment process delays you getting paid. If a client's preferred method isn't available, they'll put it off. Bank transfer, card, and any relevant local payment methods all help.
5. Follow a Consistent Reminder Schedule
Before due date, on due date, one week after, two weeks after — every time, without exception. Inconsistency teaches clients that late payment has no consequences.
6. Require Deposits for Large or New Jobs
A 25-50% deposit upfront eliminates a large portion of bad debt risk and immediately tests whether a new client is serious.
7. Run an Ageing Report Weekly
Know your receivables position at all times. Don't wait until cash is tight to discover you have three 90-day-old invoices sitting unpaid.
8. Set Credit Limits for New Clients
Don't extend unlimited credit to clients you don't know. Set a threshold — say, $2,000 — beyond which you require payment before issuing more invoices.
The Cost of Bad Debt
When a client doesn't pay and you write off the invoice, you don't just lose the invoice amount. You lose:
On a 20% profit margin business, a $1,000 bad debt requires $5,000 in new sales just to recover. Prevention is vastly cheaper than write-off.
Accounts Receivable in Quotation Expert
Quotation Expert's sales report includes an aged receivables breakdown — showing exactly which clients owe what, and how long their invoices have been outstanding. The Invoiced, Collected, and Outstanding figures on the dashboard give you a real-time picture of your AR position without any manual calculation.
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