Key Accounts Receivable Definitions and Terms

Last updated February 2023

Managing the money customers owe your business is a vital – often overlooked – part of maintaining a healthy business. If your accounts receivable (or billing) department could use some attention, start with the basics.

Here’s a glossary of accounts receivable definitions and terms every AR billing professional should know.

DEFINITION OF ACCOUNTS RECEIVABLE

Money due to a business or seller for goods or services delivered or used by customers, but not yet paid for.

What is Accounts Receivable (AR)?

Accounts receivable is the unpaid funds owed to a company for goods and services that have already been provided. There is usually a dedicated department in each business that is responsible for handling the accounts receivable billing and payment collection.

Accounts Receivable Aging Report

This report shows the length of time customer invoices have gone unpaid. The age of past due invoices usually correlates to how easy it will be to collect. The aged receivables report will help you manage expectations for how much you can collect and also determine what tactics your billing department should use when reaching out to customers.

Accounts Receivable Outsourcing

When a company doesn’t want to manage its own day-to-day billing procedures, it may choose to pay a third party collection agency to handle the task. This is called outsourcing. While it may make sense for some companies to outsource, it is important to evaluate whether outsourcing or internal billing is the best practice for your business.

Allowance Method

This method of writing off bad debt is when the uncollectible accounts are estimated at the end of the period rather than as they come up.

Bad Debt

Bad debt is money a consumer owes that you later learn they can’t or won’t pay. There are typically two ways billing departments can write off bad debt: direct write-off method or allowance method.

Balance Sheet

An accounts receivable balance sheet is a statement that shows the assets, liability and shareholder equity of a company. It is a quick way to understand the overall health of a company.

Cash Conversion Cycle

The time it takes company resources spent to convert to cash. This can measure the time it takes inventory to convert to revenue, or it can refer to the services a company provides.

Cash Flow

The total amount of money coming into and leaving your business.

Direct Write-Off Method

This method of writing off bad debt is when an account is expensed at the time it is decided that it can’t be collected.

Accounts Receivable Turnover Ratio

The turnover rate can be found by dividing net credit sales by average net accounts receivable. A high ratio likely means a company’s credit and collection policy is comprehensive and the collection department is effective. A low ratio may indicate an opportunity for improvement during the collection process.

Days Sales Outstanding Definition and Formula

Days Sales Outstanding (DSO)

Often, AR departments measure their outstanding accounts as the average number of days it takes to collect a payment, rather than in dollars. If your days sales outstanding calculation or DSO calculation indicates a long cycle before receiving payment, your AR department could probably do more to improve the collection process. The (DSO) days sales outstanding formula is:

DSO = Accounts Receivable/Total Credit Sales X Number of Days

Keep Your Days Sales Outstanding Ratio Low

Businesses strive to keep their average number of days to collect to under 30 days. Sales need to convert to cash or the sale doesn’t matter. This puts businesses in a difficult position at times. It is important to provide a good customer experience, but it is also important to ensure products or services are paid in a timely manner.

Software that automates your accounts receivable processes will help keep your average DSO low and create a good experience for your customers.

PDCflow provides companies with a full payment suite for businesses to offer convenient, safe payment options to their customers. Along with this, companies can use Flow Technology (our outbound message delivery system) to simplify the way you engage with customers about their payments.

With PDCflow, you can:

Capture and store payment data

Capture payment information for future payments when a sales order or contract is signed. Flow Technology works by letting your sales team roll several actions into one workflow and send it all at once to customers. The customer commits by signing your sales order and entering their payment information. The payment is stored securely and can be used for all future invoices.

Create one-step workflows

Send invoices, billing statements, and payment reminders to customers through email and text. With unlimited templates and user set up capabilities, your entire sales team and accounts receivable department can have the templates they need ready to send with just one click.

Speak to a PDCflow payment expert today to learn more about PDCflow’s payment communication software and how automating your accounts receivable processes can help keep your business cash flow healthy.

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