Accounts Receivable Management and Control

What is Accounts Receivable Management?

Accounts receivable management, often abbreviated as A/R management, is an important part of a company’s order-to-cash process. When one of your customers purchase a product or service from you and does not pay for it in full up front, the balance they owe you is known as accounts receivable.

For example, a customer can owe accounts receivable to their vendor if they purchase a product or service on business credit or as part of a payment plan. Accounts receivable management consists of the methods and processes that companies use to 1) understand from a financial perspective how much money is owed to them from their customers and 2) go about collecting the owed payments.

It’s important to proactively practice accounts receivable management by collecting revenue to improve cash flow and help protect your company from bad debt. Slow paying customers can have a negative impact on a company’s monthly cash flow.

The way a company can understand how much money is owed to them can be as simple as maintaining a spreadsheet with the customer’s company name, invoice number(s), the outstanding amount, the date the balance is due, and, if the payment is late, how many days past due. This is a list of your “aging” accounts and so this report known as an aging report. When done manually, it can take a lot of time and effort to update and maintain every month or every quarter.

A company will often further analyze their aging accounts receivable by segmenting the data into “aging buckets” – or how late each customer is in their payment cycle. These are often bucketed into 15- or 30-day increments, such as current, 1-30 days, 31-60 days, 61-90 days, and 90+ days past due. This helps a company more easily understand which accounts to prioritize for collections. Over time, companies can spot trends and understand its “repeat offenders.”

Account receivable is an asset transaction in the balance sheet because it is credit sales and the payment is usually later. That pending payment as a result of credit sales is referred to as account receivable which is not cash but cash equivalent.

Best Practices & Policies for Accounts Receivable Management

-Promptly Send Invoices

-Make it Easy for Your Customers to Pay You

-Monitor Slow Paying Accounts

Key Performance Indicators ?to Track for Accounts Receivable

? Days Sales Outstanding (DSO)

DSO expresses the average time it takes a firm to convert its accounts receivables to cash. DSO is one of the most often misused and misunderstood performance measures. Its value lies in the ability help determine if a change in A/R is due to a change in sales, or to another factor such as change in selling terms.

It is composed of: terms (the future & current receivables), delinquent invoices and operational errors, service and quality problems, disputes, and deductions. (definition ?provided by The Credit Research Foundation)

Formula:? Ending Total Receivables / Number of Days in Period Analyzed ÷ Credit Sales for Period Analyzed

It’s also helpful to compare your company’s DSO to industry averages; Dun & Bradstreet’s Aging A/R and DSO Industry Report, produced in partnership with the Credit Research Foundation, provides these benchmarks.

? Collection Effectiveness Index (CEI)

The CEI expresses the effectiveness of collection efforts over time. The closer to 100%, the more effective the collection effort is. It is a measure of the quality of the collection of receivables. Note: CEI can be used as a departmental or individual performance measure. (definition provided by The Credit Research Foundation)

Formula: Beginning Receivables + (Credit Sales/N*) - Ending Total Receivables Beginning Receivables + (Credit Sales/N*) - Ending Current Receivables x 100 *N = Number of Months

? Accounts Receivable Turnover Ratio

The Accounts Receivable Turnover Ratio is a formula used in accounting to measure how efficiently a business is extending credit and collecting debt. While it may sound complex, it’s actually quite easy to calculate because it only requires two budget numbers – net credit sales and average accounts receivable.

Formula: Net Credit Sales ÷ Average Accounts Receivable

Thank You ,

Mohsen E Helaly

www.mohsenelhelaly.online