Definition
Accounts receivable (AR) represents money owed to your business by customers for goods or services delivered but not yet paid for. It appears as a current asset on your balance sheet.
Why It Matters
The average SMB has 25% of its revenue tied up in accounts receivable at any time. For a $5M business, that's $1.25M sitting in other people's bank accounts. High AR means your P&L looks healthy but your bank account doesn't.
Key metrics to track:
- Days Sales Outstanding (DSO): Average number of days to collect payment. Lower is better.
- AR Aging: How much is current, 30 days, 60 days, 90+ days past due.
- Collection rate: Percentage of invoiced revenue actually collected.
How to Calculate Key AR Metrics
Days Sales Outstanding (DSO) = (Accounts Receivable / Total Credit Sales) x Number of Days
AR Turnover = Net Credit Sales / Average Accounts Receivable
Example: A marketing agency bills $600K in Q1 and carries an average AR balance of $150K. AR turnover = 4 for the quarter (or 16 annualized). DSO = ($150K / $600K) x 90 = 22.5 days. That's solid. But if one client owes $80K of that $150K and is 60 days past due, the average hides a serious concentration risk.
How to Improve AR
- Shorten payment terms from Net 60 to Net 30
- Offer 2% early payment discounts (2/10 Net 30)
- Automate invoice reminders at 7, 14, and 21 days
- Require deposits for large projects
Benchmarks
Healthy DSO varies by industry, but as a general rule: under 30 days is excellent, 30-45 days is normal for B2B, and anything above 60 days signals a collection problem. Professional services firms typically run 35-50 days. SaaS businesses with upfront billing can achieve single-digit DSO. The real benchmark is your own trend — if DSO is climbing quarter over quarter, something in your billing or collection process is breaking down regardless of the absolute number.
How CentSight Helps
CentSight tracks your AR in real time, shows aging breakdowns by customer, and alerts you when receivables are trending late. Ask: “Who owes us the most right now?” or “Which customers consistently pay late?”