Accounts Receivable
Why it matters
A business can look healthy on its profit and loss statement and still run out of money. Sales are recorded when the invoice goes out, but the bank balance only moves when the customer pays. The longer that gap, the more of the business's own money sits in other people's bank accounts. Slow payment is one of the most common reasons a growing, profitable company is short of cash.
How to apply it
- State payment terms on the invoice itself, not only in the contract.
- Send the invoice on the day of delivery, not in one batch at month end.
- Run an ageing report, which groups unpaid invoices by how overdue they are, such as 0 to 30 days, 31 to 60 and over 60.
- Track days sales outstanding, the average number of days customers take to pay. Divide receivables by revenue for the period, then multiply by the number of days in it.
- Chase anything overdue within days. The longer an invoice ages, the less likely it is to be paid in full.
What it is
When a business sends an invoice and gives the customer thirty days to pay, the sale is complete but the cash has not arrived. The unpaid amount is accounts receivable. In British English it is also called debtors. It counts as an asset because it is owed to the business, but it cannot pay a salary or a supplier until it turns into cash.
Common mistakes
- Treating receivables as cash when planning spend.
- Letting one large client's balance drift without a call.
- Chasing by automated reminder only, when a short conversation would find the real blocker.
