Financial Intelligence
Outstanding receivables are not income until they clear your account. Operators who treat invoiced revenue as earned revenue get into trouble fast.
AR aging organizes outstanding invoices into time buckets. Each bucket has a different collection probability and requires a different response.
Standard follow-up. No urgency.
Active follow-up. Direct contact. Confirm payment date.
Escalation mode. Firm communications. Consider service pause.
Final demand. Collections or legal referral decision required.
DSO measures how many days on average it takes to collect payment after invoicing. Lower is better. High DSO signals either weak collection processes or difficult customers.
DSO = (Total AR ÷ Total Credit Sales) × Number of Days
Simplified: weighted average days outstanding across all invoices
Invoice immediately
Send the invoice the day work is completed, not at end of month. Every day delay is a day added to DSO.
Require deposits
50% upfront removes the collection problem entirely for half the revenue.
Short net terms
Net 15 collects faster than Net 30. Net 7 collects faster than Net 15. Default to shorter.
Automated reminders
Automated 3-day and 7-day-before-due reminders reduce late payments by 30–40%.
Personal follow-up at day 31
A personal call or message at 31 days recovers 60–70% of late invoices.
No new work on overdue accounts
Do not extend more credit to clients with outstanding balances over 45 days.
A receivable that won't be collected is an asset you don't have. Holding it on the books overstates your financial position. Most accountants recommend write-off at 180 days with no response after collections attempts.
Write-offs are a deductible business expense. Document all collection attempts before writing off. If the client pays later, the payment is recognized as income in the year received.