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Accounts Receivable (AR)

What is Accounts Receivable?

Accounts Receivable (AR) are those debts that are owed to a company by its customers for goods or services supplied, and for which payment has yet to be made. Accounts Receivable must always be recorded under the current asset account on the balance sheet. This includes invoicing, payment tracking, and collections that are designed to guarantee effective cash flow and customer relationships under the defined credit terms the latter being different from cash sales.

 

Key Terms

 

Term Definition
Accounts Receivable Current assets amounting unpaid bills with customers.
Invoice Generation Creation and distribution of request for payment to customers.
Payment Terms Conditions that have been agreed upon regarding payment, e.g., Net 30, 2/10 Net 30.
Aging Reports Receives accounts receivable according to the due date for overdue accounts detection.
DSOs (Days Sales Outstanding) Measures how many average days it takes for payment to be received after sale.

 

Aging Report

Stock-based aging invoices for collection action prioritization:

 

Timeframe Action
0-30 days Watch for incoming payments
31-60 days Send payment reminders
61-90 days Forward to collections
Over 90 days Consider write-off

 

AR Automation

These are services that would automate the management of receivables by these types of technology:

  • Automated Invoicing: Generates/delivers invoices via email/portals.
  • Payment Portals: Self-service platforms for customers making payments.
  • AI Collections: Prioritizes overdue accounts using predictive analytics.

 

Components of the Processes of AR 

Component Function
Credit Management Assesses customers’ creditworthiness and limits
Invoice Delivery Pay invoices electronically (via EDI, email, etc.)
Collections Consistent follow-up of overdue payments
Cash Application Matching payments with open invoices

 

Key Metrics

DSO: <45 days is the target (measures how fast everything gets collected). Collection Effectiveness Index (CEI): >80% (measures how effective all collections are).

Bad Debt Ratio: Less than 2% of total AR (tracks uncollectible accounts).

 

Conclusion

Automated modern-day practice of AR, alongside data analytics, helps reduce DSO, improve cash flow predictability, and build confidence with clients. Businesses are placing AR as a functional strategic importance that directly drives financial stability and growth, transforming operational processes through the integration of tools such as AI-driven aging reports and digital payment portals.

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