Accountancy 101: A Guide to Assessing Accounts Receivable

Accounts Receivable

Cash flow and receivables are inextricably linked. Accounts receivable are a crucial source of cash flow for many firms, so they must be managed properly. A financial shortfall can put pressure on your company. It has the potential to destroy your supplier connections, and creditworthiness, and put you out of business.

After implementing these processes, you will need to determine if your A/R (accounts receivable) practices are effective. Even the most efficient A/R processes must be monitored and optimized to ensure consistent cash flow.

Accounts receivable issues have a negative impact on cash flow. Accounts receivable analysis should be used on a regular basis to predict and/or identify problems before they cause a cash crisis. Thankfully, today, you can investigate your accounts receivable using A/R analysis tools to identify the health of your company and any potential risks.

Read on to discover this basic guide to assessing your accounts receivable.

Securing Enough Money for Urgent Needs

Accounts receivable analysis can help with cash flow management and forecasting. The average collection period (DSO: Days Sales Outstanding) reveals how quickly your customers pay. You can compute your ACP using this equation: 

ACP = (average accounts receivable/total value of sales in period) x (days in period)

The DSO should be less than the average collection terms multiplied by 33%. If your normal payment terms are 30 days, the algorithm extends them to 40 days.

A value less than the DSO indicates fast payments and sufficient liquidity to address immediate demands. A figure larger than the DSO could indicate issues and a cash shortage.

Collecting Receivables to Streamline Cash Flow

Perhaps you’re also here because you’re unsure how to collect receivables. Regularly monitoring your process efficiency will help you avoid an unexpected shortage. The ART ratio is a widely used statistic. 

You can compute for ART using this equation:

ART in days = 365/(net credit sales/average accounts receivable)

It is typical, as with ACP, to compare average turnover to standard payment terms in days. If your ART is less than your average payment interval, your receivables process is efficient, but your cash flow is volatile.

Identifying the Invoices That Are Harder to Collect

Whether your accounts receivable are generating cash flow problems or putting you in jeopardy, you must assess whether certain bills or clients are inhibiting cash flow efficiency. Customers who pay late might be costly to your organization. These customers must be recognized and treated differently than your more trustworthy clients as part of your cash management plan. Consider seeking advance payment to improve cash flow, or cease service if the problem persists.

Assessing Credit Terms

Credit increases sales by giving customers financial flexibility, but you can’t give credit to everyone, or you’ll be swamped with write-offs and go out of business. Accounts receivable analysis can assist in increasing profits and minimizing losses.

Additionally, you must know that if several clients’ invoices are past due, you may need to limit credit. The assessment of bad debt patterns is another data-driven strategy. 

There are other methods for determining the percentage of bad loans, but the most important is to look at the entire year. If your business or finances are growing, this implies flexible credit terms. If it is falling, you can boost sales by loosening your terms.


Fixing and assessing finances can be a daunting task to accomplish. Thankfully, we have this guide to assist in making the topic a lot less intimidating. Now that you have some knowledge of how to do things right, you should also consider working with a trusted professional to further assist and educate you.

Are you looking for an accountant in Framingham, MA? Ash CPA is here to help you get on top of your finances, give you more opportunities, and educate you–all at an affordable price! Contact us today to learn more about our services!