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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 management terms every AR billing professional should know.
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 an unpaid account usually correlates to how easy it will be to collect. This 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 their own day-to-day billing procedures, they may choose to pay a third party 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.
This method of writing off bad debt is when the uncollectable accounts are estimated at the end of the period rather than as they come up.
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.
A 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.
The total amount of money coming into and leaving your business.
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 DSO indicates a long cycle before receiving payment, your AR department could probably do more to improve the collection process. The formula to calculate DSO is:
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.
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.
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