What accounts receivable is, how it works, and how CFOs optimize their AR process to improve cash flow and reduce DSO.
What accounts receivable is, how it works, and how CFOs optimize their AR process to improve cash flow and reduce DSO.
AR. It's quintessential.
Most finance leaders think of accounts receivable as a necessary evil—invoices sent, payments waited for, collections chased.
But here's the reality: accounts receivable represent one of the most powerful levers in a CFO's toolkit for managing cash flow, optimizing working capital, and building predictable financial operations.
The difference between treating AR as an administrative burden versus a strategic asset often separates thriving companies from those constantly scrambling for cash.
Accounts receivable represent the money a business is owed by customers for goods or services that have been delivered but not yet paid for.
On the balance sheet, AR appears as a current asset, and that classification matters more than most realize.
When a company delivers a product or completes a service, it creates an invoice.
The moment that the invoice is issued, the amount becomes part of accounts receivable. This isn't just an accounting entry; it's a financial bridge between completing work and receiving payment. The strength of that bridge determines how smoothly cash flows through the business.
Smart CFOs view AR as a liquidity lever. Every dollar sitting in receivables is a dollar not available for operations, growth investments, or unexpected challenges. The faster those receivables convert to cash, the stronger the company's financial position becomes.
The accounts receivable process follows a predictable sequence, but the execution of each step determines whether collections happen smoothly or turn into cash flow nightmares.
Marks the beginning. The work is done, the product is shipped, and the customer has received value. This triggers the invoicing process.
It should happen immediately after delivery. Delays here create the first crack in the cash flow pipeline. The invoice must be accurate, complete, and sent to the right person at the customer's organization. Services like Quickbooks and Xero are popular softwares.
determines when cash actually hits the bank account. Terms like "Net 30" or "2/10 Net 30" aren't just administrative details—they're strategic decisions that affect cash flow timing and customer relationships.
Close the loop. This includes following up on overdue payments, resolving disputes, and matching payments to invoices. Companies that excel at this stage maintain consistent cash flow; those that struggle face perpetual liquidity challenges.
The timing between these steps matters enormously.
A company that takes five days to issue invoices after delivery versus one day has effectively extended its cash conversion cycle by four days across every transaction. Multiply that across hundreds or thousands of transactions, and the cash flow impact becomes material.
Here's where most finance teams miss the strategic opportunity. Accounts receivable isn't just about getting paid—it's about optimizing the entire operating cycle to support business objectives.
Companies with efficient AR processes can extend more favorable payment terms to win better customers, invest in growth opportunities sooner, and maintain stronger relationships with suppliers through improved cash flow predictability.
The truth is in the numbers: reducing days sales outstanding by just five days can free up significant cash for a growing business. For a company with $10 million in annual revenue, that five-day improvement typically releases $135,000 in working capital. For larger organizations, the impact scales proportionally.
The Reality Check Every CFO Recognizes
Look, every CFO has been there—staring at a cash flow forecast that shows a temporary shortfall right when the business needs to invest in a key opportunity. Nine times out of ten, the culprit isn't revenue generation; it's money sitting in AR that should have been collected weeks ago. This is exactly why fractional and interim CFOs spend so much time initially focused on AR process improvement—it's the fastest path to financial stability.
Understanding the relationship between accounts receivable and accounts payable reveals the complete picture of working capital management.
AR represents cash coming in.
The timing difference between these flows determines whether a company operates with positive or negative working capital.
The strategic opportunity lies in optimizing both simultaneously. Companies that collect receivables quickly while taking full advantage of payment terms with suppliers create a natural financing mechanism. This approach generates cash flow that can fund growth without external financing.
Sophisticated CFOs track the ratio between AR and AP, along with the timing of each. A business that collects receivables in 25 days while paying suppliers in 35 days has created a 10-day financing float. Scale that across the entire operation, and it becomes a meaningful competitive advantage.
Measurement drives improvement, and accounts receivable offers several key metrics that reveal operational efficiency and cash flow health.
Measures the average number of days it takes to collect receivables. The calculation is straightforward: (Accounts Receivable ÷ Daily Sales) = DSO. A lower DSO indicates faster collections and better cash flow.
Shows how efficiently a company collects its receivables during a period. Higher turnover ratios indicate more efficient collection processes. The formula is: Net Credit Sales ÷ Average Accounts Receivable.
Breaks down receivables by how long they've been outstanding. This analysis reveals collection patterns and identifies potential bad debt before it becomes a problem. Companies should track percentages of receivables that are current, 30 days past due, 60 days past due, and beyond.
Improving AR efficiency requires systematic attention to several operational areas:
establish expectations before problems arise. Companies should evaluate customer creditworthiness, set appropriate credit limits, and document terms clearly. This prevents many collection issues before they start.
eliminates delays and errors. Systems that generate invoices immediately upon delivery or service completion remove the human bottleneck that often slows collections.
And prompt follow-up on overdue accounts prevents small issues from becoming major problems. Automated reminders for approaching due dates and systematic escalation procedures for overdue accounts maintain cash flow momentum.
Accounts receivable appears in the current assets section of the balance sheet, but the story it tells depends on the context and trends.
Growing AR balances can indicate strong sales growth or deteriorating collection performance.
The key is understanding AR growth relative to revenue growth. If receivables are growing faster than sales, it suggests collection issues. If they're growing proportionally, it likely reflects business expansion.
Investors and lenders pay close attention to the "net realizable value" of accounts receivable. This figure represents gross receivables minus the allowance for doubtful accounts (bad debt reserves). Companies that maintain appropriate reserves demonstrate financial prudence; those with insufficient reserves may face earnings surprises when bad debts materialize.
The quality of receivables matters as much as the quantity. A receivables balance concentrated among a few large customers carries more risk than one spread across many smaller accounts. Similarly, receivables aged beyond normal payment terms represent higher collection risk and potential cash flow problems.
Even experienced finance teams fall into predictable AR traps that damage cash flow and increase collection costs.
create confusion and delay payments. Companies that invoice irregularly, use different formats, or send invoices to the wrong contacts add friction to the collection process. Standardizing billing procedures eliminates these unnecessary delays. Automation and AI are even beginning to help out more, as they do much of the work for you.
Leads to disputes and delayed payments. Customers can't pay what they don't understand or can't verify. Clear invoices with detailed descriptions, proper authorization, and supporting documentation prevent most payment disputes.
May win business but strain cash flow. You're not a bank for your customers. Terms like "Net 60" or "Net 90" can create competitive advantages, but must be balanced against cash flow requirements. Companies should evaluate whether longer terms truly drive incremental sales or just extend collection cycles.
Overdue balances allow small problems to become major losses. Systematic follow-up procedures, starting with friendly reminders and escalating to formal collection efforts, maintain payment momentum and preserve customer relationships.
These pitfalls increase days sales outstanding and create liquidity risk. Companies that address them systematically typically see immediate improvements in cash flow and collection efficiency.
Technology has transformed accounts receivable from a largely manual process to an automated system that improves accuracy, speeds collections, and provides real-time visibility into cash flow.
Modern AR platforms integrate with existing accounting systems like QuickBooks, NetSuite, and Sage to streamline the entire process. These tools automatically generate invoices upon delivery, send payment reminders, and track collection activities. The result is faster payments, fewer errors, and reduced administrative burden.
Eliminates delays and ensures consistency. Systems can generate invoices immediately when goods ship or services are delivered, removing the human bottleneck that often slows collections.
Makes it easier for customers to pay quickly. Online payment portals, ACH processing, and mobile payment options reduce friction and accelerate cash flow.
Provides instant visibility into AR performance. CFOs can track DSO, aging reports, and collection metrics in real-time rather than waiting for month-end reports.
Help identify collection risks before they become problems. Advanced systems analyze payment patterns to predict which invoices are likely to become overdue, enabling proactive collection efforts.
The benefits extend beyond operational efficiency. Automated AR systems provide the financial visibility that enables better cash flow forecasting, more accurate financial projections, and improved strategic decision-making.
Accounts receivable represents far more than an accounting entry or administrative task. It's a strategic asset that, when managed effectively, drives cash flow, supports growth, and creates competitive advantages.
The companies that thrive are those that view AR as a system to be optimized rather than a problem to be managed.
They invest in proper processes, leverage technology, and maintain focus on continuous improvement. The result is predictable cash flow, reduced financing costs, and the financial flexibility to capitalize on opportunities.
Regular AR audits reveal opportunities for improvement that often deliver immediate results.
Still, there comes a point in time when growing companies hit a wall. They've outgrown manual AR processes, maybe moved from cash-based to accrual accounting, but they haven't invested in the systems and expertise to automate effectively.
The result?
Founders are spending their time chasing invoices instead of driving strategy.
It's one of the most common scenarios where fractional CFO support makes immediate sense—bringing both the expertise to select the right tools and the experience to implement them correctly.
The strategic opportunity is clear: transform accounts receivable from a reactive administrative function into a proactive cash flow engine.
Companies that make this transformation gain:
Ready to transform your AR process from a cash flow bottleneck into a strategic advantage?
McCracken Alliance specializes in helping Companies connect with skilled CFOs who help optimize their accounts receivable operations through:
Whether you need fractional CFO expertise to redesign your AR system or interim leadership to manage a transformation, we bring the experience and tools to deliver immediate results.
Reach out to us today to start turning your AR challenges into cash flow advantages.
Accounts receivable represents money owed to your business by customers who have received goods or services but haven’t paid yet.
It’s recorded as a current asset, reflecting short-term amounts expected to be collected.
Accounts receivable is money coming in; accounts payable is money going out.
Late or inaccurate invoices, unclear payment terms, and lack of follow-up are among the most common.
Set clear terms, invoice promptly, use automation tools, and follow up consistently to reduce DSO.
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