Accounts Receivable: Part I

Unlocking Cash Flow

This blog is part of the High-Performing Company Series, on Accounts Receivable. To read Part II, click here.

Accounts receivable (AR) is one of the most critical components of your small to medium-sized business’ cash flow. While extending credit to customers is often necessary, delayed payments can leave you cash-trapped, forcing you to borrow for daily operations or absorb high collection costs.

That’s where financial ratio analysis comes in. By focusing on key AR ratios, you can identify inefficiencies, take actionable steps to improve collections, and significantly boost your cashflow.

In this two-part blog series, we’ll break down the four essential AR ratios you need to know. Part I focuses on:

Daily Sales Outstanding (DSO)
Delinquent Sales Outstanding (ADD)

These ratios provide a comprehensive view of your AR operations and actionable insights to help you transform your collections process.

‍

Daily Sales Outstanding (DSO)

What is it?‍

DSO measures how many days, on average, it takes your company to collect cash from outstanding invoices within a specific period (e.g., monthly, quarterly, or annually).

What does this question answer?‍

How many days on average, within a single period, does it take your business to collect an invoice?

Why it matters:‍

Unpaid receivables not only restrict your cash flow but may require you to borrow funds for daily operations or incur high collection costs (e.g., staff salaries, phone calls, and reminders). Understanding your DSO allows you to take informed, targeted actions to speedup collections and free up cash.

‍

Example:‍

Imagine your company has a DSO score of 48, while the goal score for your industry is 15. The cash trapped in this 33-day gap might amount to $125,689. Armed with this knowledge, BizWell can provide actionable steps to move closer to your goal score and unlock this trapped cash.

How To Improve DSO With BizWell:‍

Our software can:

• Calculate your current and goals cores.
• Show the exact steps needed to reduce DSO.
• Define how much cash will be freed up as you improve.

‍

Delinquent Sales Outstanding (ADD)

What is it?‍

A variation of DSO, ADD focuses specifically on past-due receivables, excluding current invoices. It measures how many days, on average, it takes to collect overdue cash during a specific period.

What question does it answer?‍

How many days on average, within a single period, does it take your business to collect a past due invoice?

Why it matters:‍

Past-due receivables represent an even more pressing issue than overall receivables. These delayed payments often create significant cash flow challenges, forcing your company to borrow money or absorb higher operational costs to chase delinquent customers.

How to improve ADD with BizWell:‍

Our financial ratio technology software can:

• Identify the worst-paying customers by analyzing ADD scores.
• Offer step-by-step guidance to reduce ADD and improve collections.
• Help prioritize past-due invoices to address the most pressing issues first.

Key takeaway:‍

Lowering your ADD score will not only improve your cash flow but also reduce the costs associated with overdue collections.

‍ 

A Short List of Actionable Items to Improve AR Performance:

To optimize your accounts receivable, consider implementing these strategies:

1. Use the BizWell “Customer Ratio Report” to identify the worst-paying customers by sorting ADD days in descending order.
2. Automate your AR processes, from generating invoices to sending reminders, using a CRM or AR automation software.
3. Include key metrics like ADD days, due dates, and overdue days directly on invoices and statements.
4. Simplify the payment process by offering multiple convenient payment methods.
5. Regularly update customer credit information to reduce risk.
6. Follow up consistently on customer disputes to resolve them quickly and avoid further delays.
7. Routinely review AR aging reports in BizWell and monitor your company’s ratio scores monthly and quarterly.
8. Periodically evaluate your collection process and adjust for inefficiencies.
9. Consider a consultation with BizWell for additional guidance and best practices.

Next Steps

Improving your business’ AR ratios is a critical step toward increasing cash flow and becoming a high-performing company. Be sure to check out Part II of this series, where we explore two additional AR ratios: the Collection Effectiveness Index (CEI) and Accounts Receivable Turnover (ART).

‍