Accounts Receivable

Accounts receivable is essentially a short-term loan you extend to your customers. When you deliver a product and invoice the customer with "Net 30" terms, you are allowing them 30 days to pay. During that window, the amount sits in your AR balance. Healthy AR management is crucial because revenue on paper means nothing if the cash never arrives. The key metric is Days Sales Outstanding (DSO), which measures the average number of days it takes to collect payment after a sale. A rising DSO signals collection problems. The AR process involves invoice generation, delivery, payment tracking, dunning (sending reminders for overdue invoices), and cash application (matching incoming payments to open invoices). Each step has potential for error and delay if handled manually. For example, cash application can be surprisingly complex when a customer sends one payment to cover three invoices, or pays a slightly different amount due to deductions. Credit management is closely tied to AR. Before extending payment terms to a new customer, businesses typically assess creditworthiness to avoid bad debt. Once terms are granted, AR teams monitor aging reports that bucket outstanding invoices by how overdue they are: current, 1-30 days, 31-60 days, 61-90 days, and over 90 days. Invoices that age beyond 90 days often require write-off provisions, which reduce profitability.