Accounts Receivable FAQ: Your AR Questions Answered
Find answers to common questions about accounts receivable, DSO, collection strategies, and AR automation. Expert guidance for finance teams.
General AR Questions
What is accounts receivable?
Accounts receivable (AR) is money owed to a company by its customers for goods or services delivered but not yet paid for. AR appears as a current asset on the balance sheet and represents future cash inflows. For B2B companies, managing accounts receivable effectively is critical for maintaining healthy cash flow and funding operations.
What is accounts receivable automation?
Accounts receivable automation is software that automates manual AR tasks including invoice generation, payment reminders, cash application, and collections follow-up. AR automation reduces human effort, improves consistency, and accelerates cash collection. Modern AR automation uses AI and machine learning to personalize collection strategies and predict payment behavior.
What is the difference between accounts receivable and accounts payable?
Accounts receivable (AR) is money owed TO your company by customers — it's an asset. Accounts payable (AP) is money your company owes TO suppliers — it's a liability. AR represents incoming cash you're waiting to collect; AP represents outgoing cash you need to pay.
What is the accounts receivable process?
The accounts receivable process includes five core steps: 1) Credit approval — Evaluate customer creditworthiness before extending terms, 2) Invoicing — Generate and send invoices for goods or services delivered, 3) Collections — Follow up on unpaid invoices through reminders and outreach, 4) Cash application — Match incoming payments to open invoices, 5) Reporting — Track AR aging, DSO, and collection performance.
DSO Questions
What is DSO (Days Sales Outstanding)?
Days Sales Outstanding (DSO) is the average number of days it takes a company to collect payment after making a sale. DSO measures how efficiently a company converts receivables into cash. Lower DSO means faster cash collection and better working capital management. DSO formula: DSO = (Accounts Receivable ÷ Total Credit Sales) × Number of Days
What is a good DSO?
A good DSO for B2B companies is typically 30-45 days. DSO above 45 days indicates collection inefficiencies. However, 'good' DSO varies by industry: Retail averages 20-30 days, Professional services 35-50 days, Manufacturing 50-70 days, and Construction 60-90 days. The best benchmark is your own historical DSO and your payment terms.
How do I calculate DSO?
Calculate DSO using this formula: DSO = (Accounts Receivable ÷ Total Credit Sales) × Number of Days in Period. Example: If your AR balance is $500,000, credit sales for the quarter were $1,500,000, and the quarter has 90 days: DSO = ($500,000 ÷ $1,500,000) × 90 = 30 days. Calculate DSO monthly or quarterly to track trends.
How can I reduce DSO?
Reduce DSO with these proven strategies: 1) Invoice promptly — Send invoices immediately upon delivery, 2) Offer multiple payment methods — ACH, credit card, and online payment options reduce friction, 3) Send payment reminders — Automated reminders before and after due dates, 4) Shorten payment terms — Move from Net 60 to Net 30 where possible, 5) Implement early payment discounts — Offer 2/10 Net 30, 6) Automate collections — AR automation ensures consistent follow-up. Companies typically reduce DSO by 15-25% within 90 days of implementing AR automation.
Collections Questions
How many collection emails should I send before calling?
Send 5 emails over 30 days before adding phone calls to your collection strategy. A typical sequence: Day -7: Pre-due reminder, Day 0: Due date notice, Day +7: First overdue reminder, Day +14: Second overdue notice, Day +30: Final notice. After 30 days without payment or response, add phone calls for accounts with significant balances.
When should I send invoices to collections?
Consider sending invoices to external collections when: Invoice is 90+ days overdue, you've made at least 5 email attempts and 2-3 phone calls, customer is unresponsive to all outreach, and there is no active dispute. For large balances, consider earlier escalation (60 days). Document all collection efforts before escalating.
What late fees can I charge?
Standard B2B late payment fees range from 1-2% per month (12-24% annually). Your ability to charge late fees depends on: Clear disclosure in your payment terms and contracts, state laws governing interest rates and fees, and customer agreements. Always state late fee terms upfront and reference them in collection emails before applying fees.
How do I handle disputed invoices?
Handle invoice disputes by: 1) Responding promptly — Acknowledge the dispute within 24-48 hours, 2) Documenting everything — Keep records of all communications and evidence, 3) Separating undisputed portions — If part of the invoice is undisputed, pursue payment for that amount, 4) Involving the right people — Connect customer with the team member who can resolve the issue, 5) Setting clear timelines — Agree on a resolution deadline and follow up accordingly.
AI & Automation Questions
What is an AI agent for accounts receivable?
An AI agent for accounts receivable is autonomous software that uses artificial intelligence to manage collections tasks—including sending payment reminders, predicting payment behavior, prioritizing collection efforts, and applying cash—without requiring constant human direction. Unlike rule-based automation, AI agents learn from patterns in your data and adapt their strategies over time.
How much can AI reduce DSO?
Companies implementing AI-powered AR automation typically see DSO reductions of 15-25% within the first 90 days. Some achieve 30%+ improvement over 6-12 months as the AI learns from your specific customer base and payment patterns.
What is the ROI of AR automation?
AR automation delivers ROI through multiple channels: DSO reduction (15-25% improvement), Manual effort reduction (30-50% time savings), Collection rate improvement (25-40% more collected), Bad debt reduction (20-30% fewer write-offs), Cash application speed (80% faster processing). For a company with $10M in annual receivables and $500K in AR staff costs, AR automation typically delivers $200K-400K in annual value.
Does AR automation replace AR staff?
AR automation augments staff rather than replacing them. Automation handles routine, high-volume tasks (sending reminders, matching payments, generating reports) while human collectors focus on high-value activities: complex disputes, relationship management, strategic accounts, and exception handling. Most companies maintain AR headcount while significantly increasing the number of invoices and customers they can manage.
Payment Questions
What payment methods should I offer?
Offer multiple payment methods to reduce friction and accelerate collection: ACH/Bank transfer (lowest fees, preferred for large amounts), Credit card (higher fees but faster, convenient for smaller invoices), Check (still used by some customers, slower processing), Online payment portals (convenient, with automatic reconciliation). More payment options = fewer payment delays.
Should I offer early payment discounts?
Early payment discounts like 2/10 Net 30 (2% discount if paid within 10 days) can accelerate cash collection. Consider offering discounts when: You have cash flow needs, the discount cost is less than your cost of capital, and customers have the cash to pay early. Calculate the effective annual rate of your discount to ensure it makes financial sense.
What are standard B2B payment terms?
Common B2B payment terms include: Net 30 (most common), Net 15 (for smaller invoices or new customers), Net 45/60 (for large accounts or industry standard), 2/10 Net 30 (2% discount for early payment). Payment terms should balance customer expectations with your cash flow needs. Shorter terms reduce DSO but may affect customer relationships.