Cash flow problems kill more small businesses than lack of profit. And the number one cause of cash flow problems is poor accounts receivable management. Here is what accounts receivable is, why it matters and how to manage it properly.
What Is Accounts Receivable?
Accounts receivable — often abbreviated as AR — is money owed to your business by customers who have received your product or service but have not yet paid. When you send an invoice and the client has not paid, that unpaid amount sits in accounts receivable on your balance sheet.
It is an asset — money you are owed — but it only becomes real cash when the client actually pays.
Why Does It Matter?
A business can be profitable on paper but cash-poor in reality if its clients are slow to pay. If you have $50,000 in unpaid invoices sitting in AR while your payroll and rent are due, you have a serious problem — regardless of what your P&L shows.
Tracking AR closely tells you how much money is coming in, when it is coming and which clients are habitually late.
Key AR Metrics to Track
Days Sales Outstanding measures the average number of days it takes your clients to pay an invoice. A DSO of 30 means clients pay within a month on average. A DSO of 60 or above is a warning sign for most service businesses.
AR aging is a report that shows all unpaid invoices grouped by how long they have been outstanding — current, 1 to 30 days overdue, 31 to 60 days, 61 to 90 days and over 90 days. Reviewing this report weekly prevents small collection issues from becoming large ones.
Best Practices for Managing AR
Send invoices immediately after delivering work — not at the end of the month. Every day of delay is a day added to your collection timeline.
Set clear payment terms on every invoice. Net 15 or Net 30 are standard for US small businesses. Net 60 should be avoided unless the client specifically requires it and the relationship justifies it.
Follow up on overdue invoices promptly. Send a polite reminder on the due date, a firmer reminder at 7 days overdue and a formal notice at 30 days overdue. Most late payments are simply forgotten — a reminder resolves them quickly.
Offer early payment discounts for clients who pay within 10 days. A 2% discount costs little and often converts a 30-day payer into a 10-day payer.
For new clients with large jobs, require a deposit of 30% to 50% upfront before starting work. This filters out clients with cash flow problems and reduces your risk.
When to Write Off Bad Debt
If an invoice remains unpaid beyond 90 to 120 days and collection efforts have failed, it may be time to write it off as bad debt. This is a legitimate business expense that reduces your taxable income. Keep documentation of the original invoice and your collection attempts in case the IRS asks.
How Auxilio Handles AR for Clients
As part of our bookkeeping service, we maintain your AR ledger, produce weekly aging reports on request and flag any invoices approaching 30 days overdue. We also set up automated invoice reminders in QuickBooks or Xero so your clients receive prompts without you having to chase manually.
Book a free call to discuss your current invoicing and AR setup.