October 30, 2020

Metric Deep Dive: A/R Collections

What are A/R Collections?

Accounts Receivables (A/R) are the amount of money owed to your company from customers who made transactions for your product or service through credit. In other words, A/R is the amount of outstanding invoices you have and A/R collections is the internal process of collecting those invoices from your clients.

A/R is listed as an asset in your balance sheet. Since your product or service has already been delivered, it is considered money that is guaranteed (assuming your customers are good for it).

Why are A/R Collections Important?

Essentially, A/R collections help determine your cash flow since it is money that is indebted for you. The quicker your customers pay their invoices (pay their debt), the quicker you have that money in your hands to invest back into your business. Having an efficient and effective system is important to maximize cash flow.

Did we mention how A/R collections show your liquidity? And guess who loves liquidity? That’s right—investors! Staying on top of your A/Rs and getting the money you are owed will give your investors insight into your company’s financial health.

Aside from improving your cash flow, A/R collections are important because your company has the right to receive this money—you have already delivered the product or service to the client and they’ve reaped the benefits! An effective A/R collections process makes sure you don’t get the short end of the stick in this transaction.

How to track your A/R Collections

Tracking your A/Rs is key to an efficient collections process. Here are a few methods we recommend:

A/R Aging Report

The A/R aging report is a great way to clearly see which customers have outstanding payments, how much they owe, and what stage they are in in the collections process.

You’ll be able to track whether a customer invoice is within the payment period or past it. The aging report will let you stay on top of invoices at risk of being late.


Here we see Client Z is already past the first 30 day payment period and needs to be followed up immediately before it gets out of hand.

A/R Turnover Ratio

The A/R turnover ratio is an accounting metric that measures the company’s average account receivables compared to its total credit sales.

Formula: A/R Turnover Ratio = Net Annual Credit Sales ÷ Average Accounts Receivable

Average Accounts Receivable = (Beginning Accounts Receivable + Ending Accounts Receivable) ÷ 2

A_R Turnover Ratio Example  (1).png

Days Sales Outstanding

DSO is a SaaS metric that measures how many days on average it takes for a sale to convert to cash. It’s a great indicator of knowing the timelines of when customers will pay back their invoices so that you know when sales will turn into cash for your business.


Tracking your invoices and evaluating your collections process can come from a mixture of the three methods above or just one or two depending on your company’s needs.

A/R Collections Benchmarks

The length of your collections cycle is also a good indicator of your collections process efficiency. Typically, A/R cycles in SaaS last around 30 days, but this can vary depending on industries. Make sure to benchmark yourself against your competitors to see how you compare.

As for your A/R turnover ratio, try to keep it as high as possible—this means you are extending credit wisely. A low ratio, on the other hand, indicates a large A/R balance. With this, you might want to reevaluate some of your credit policies.

Same goes for DSO. The lower the DSO, the better. You should aim to get invoices paid back before or right at the payment term deadline.

Best Practices in A/R Collections

When dealing with A/Rs, most of the process is external; It depends on your customer and their ability to pay back their credit. However, there are things internally that you can control. These are factors that you want to perfect.


Your invoicing procedures is an internal process that you can control. Make sure any invoices sent are error free—you wouldn't want to prolong your A/R collections cycle from avoidable mistakes. Misspelling names/addresses or inputting the wrong charge should be non-existent mistakes here.

Timing of invoices is also something you can control. Holding off on invoicing your clients will just delay your customers’ ability to pay back their invoices during that time period. Even delaying it by one day after the sale is reached is adding one more day to your cycle— time is money!

Customer relationship management

It's important to stay on top of your late payments. This means following up with your customers. However, the way you handle this situation will say a lot about your customer service. Try to maintain a balance between the urgency of collecting your accounts and still pleasing your customer base.

Stay on top of your A/Rs

Viewing your A/R aging report should be a weekly occurrence and even more often if you have the time. Make sure you know whose payments are on time, which should be due soon, and how much is due.This will let you stay on top of things and conduct follow ups when needed.

How to Improve A/R Collections

By this point, you should realize how important A/R collections are for your business. Improving this process is ongoing and ever-evolving as your company grows.

Automate your follow ups

Create triggers in your collections timeline that will automatically send your customer a “nudge” email once they reach a trigger point. This will allow you to stay on top of your A/Rs and late A/Rs, while allowing you to focus on the rest of your business.

Consistent Schedule and Communication

Make sure your customers are aware of everything when it comes to paying the invoice: how much is due, when it will be invoiced, and when it is due. This is definitely something worth over-communicating from the start. Maintaining a consistent schedule will not only help you and your records, but also your customers ability to plan their expenses.

Make your A/R collections as efficient as possible

Everything is in the cloud now. If you are still physically filing your A/Rs, this might be the time to look at softwares available to help ease your work. A/R collection softwares are also a great way to eliminate human-made errors and speed up your processes!

Dunning Management

Ever had an invoice delayed because of a failed transaction from customer credit card issues? Dunning management will help solve the problem with an automated process that instantly contacts the customer about declined cards or even retries failed transactions. Dunning is a great tool to help alleviate external issues out of your control.

Implement Down Payments

Introducing down payments for a one-time project or special programming for a client is a financially responsible way to execute a project. This way, the down payment serves as the initial funds to help you conduct the project, so that your own business funds and cash flow are unaffected!

Charge Interest

More and more companies are starting to implement interest for their late payments on legal contracts/agreements. Think about it: A/Rs are a form of credit that is owed to the company, right? Not implementing credit is like a bank giving out a loan without any interest! Charging interest might be an incentive for customers to pay their A/Rs and avoid accumulating interest.

Whether it be perfecting your invoicing process or implementing an automated follow-up system, your A/R collection process should be as efficient and effective as possible. Don’t simply pass your collections process to your accounting department— this is something to be constantly evaluating and tracking!


A/R collections is the process of collecting unpaid invoices from your customers. The quicker you receive your outstanding accounts, the quicker you have cash to re-invest into your business. Go back to the top and read tips on how to stay on top of your accounts and improve your collections process.

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