8 min read
Winning a new customer is always good news. The contract is signed, the work begins, and the revenue looks promising. But depending on the payment terms, it could be another 30, 60, or even 90 days before the money reaches your bank account.
For a growing startup, that delay can become a problem. Employees and vendors still need to be paid, regardless of when customers settle their invoices. And when several customers pay late at once, a company that looks healthy on paper can find itself unexpectedly short of cash.
That's why accounts receivable (AR) deserves attention. Knowing what's owed, when payments are expected, and which customers are falling behind helps a startup make better decisions about spending, hiring, and managing its available cash.
Understanding Accounts Receivable
Accounts receivable is money customers owe a business for goods or services provided on credit. It generally appears as a current asset on the balance sheet because the company expects to collect it within its normal operating cycle.
Suppose a marketing technology startup completes a $20,000 implementation project in September and invoices the customer with net-30 payment terms. Under accrual accounting, assuming the services have been delivered and the revenue recognition requirements are satisfied, the company generally records $20,000 in revenue and a corresponding receivable. When the customer pays in October, cash increases and accounts receivable decreases. The company earned the revenue in September, but it didn't have the cash available to spend until October.
Not every customer payment creates accounts receivable. Payments collected immediately generally don't remain in AR, while advance payments for services not yet delivered may create deferred revenue rather than earned revenue. The accounting treatment depends on the transaction and applicable policies.
The Cash Flow Problem Behind Unpaid Invoices
A growing business can run into cash flow trouble even when sales are increasing. Customers may take longer to pay than the company takes to incur the costs of serving them, particularly when payroll, contractors, and other operating expenses must be paid before customer invoices are collected.
Consider a startup generating $250,000 in monthly credit sales. If customers typically pay within 30 days, the company might have roughly one month's sales tied up in receivables. If collections stretch toward 60 days, that balance could approach two months' sales, assuming steady billing and no other changes. That's potentially another $250,000 waiting to be collected, even though the company's expenses haven't slowed down.
Receivables also affect financial reporting. Customer invoices must be recorded correctly, payments applied to the appropriate accounts, and balances reviewed for amounts that may never be collected. An old invoice can remain on the balance sheet long after the customer has stopped responding, making the company's assets appear more valuable than they really are. Investors and lenders may examine receivables when evaluating working capital and the quality of reported revenue, particularly if overdue balances are increasing.
From Invoice to Payment: The AR Process
The AR process begins before an invoice is issued. Payment terms, customer information, and billing responsibilities should be established early enough to avoid confusion once the work is complete.
Establish Payment Terms Before Work Begins
Customers should understand when payment is due, which payment methods are accepted, and what happens if an invoice becomes overdue. Those expectations are best documented in the contract or service agreement rather than introduced after a payment problem develops.
Net-30 terms generally give a customer 30 days from the invoice date to pay. Other arrangements may require deposits, milestone payments, or payment in advance. The right terms depend on the customer relationship, industry expectations, and the startup's financial position. A company with substantial upfront delivery costs may have good reason to negotiate a deposit or shorter payment period.
Issue Accurate Invoices Promptly
An invoice that hasn't been sent can't be paid. Yet billing delays are easy to create when responsibility is unclear or invoices require information from several departments.
Invoices should include the customer's correct billing information, a unique invoice number, the goods or services provided, the amount due, payment instructions, and the agreed due date. Some enterprise customers also require purchase order numbers or submission through a specific vendor portal. A missing purchase order number might seem like a minor detail until the customer's accounts payable department rejects the invoice and the payment clock effectively starts over.
The IRS identifies invoices and other transaction documents as important supporting records for business accounting and tax reporting. Keeping complete billing records also makes it easier to resolve customer questions without searching through months of correspondence.
Record Payments and Follow Up on Outstanding Balances
When payment arrives, it needs to be applied to the correct customer invoice. This becomes more complicated when customers pay several invoices together, make partial payments, or deduct amounts they believe are incorrect.
For example, a customer might send $18,000 against a $20,000 invoice because they're disputing part of the project. Recording the payment without preserving the remaining $2,000 balance could conceal an unresolved collection issue. Regular reconciliation helps ensure the AR ledger agrees with supporting records and that invoices aren't left open after they've been paid.
Collection procedures should be established before invoices become seriously overdue. A courteous reminder near the due date, followed by additional contact if necessary, will often resolve an oversight or administrative delay. If payment remains outstanding, the company may need to escalate the matter, negotiate a payment arrangement, or consider other remedies consistent with its contract and applicable law.
Measuring AR Performance
Two useful measures are the accounts receivable aging report and days sales outstanding. They answer different questions, and reviewing them together provides a better picture of collection performance.
Accounts Receivable Aging Reports
An AR aging report groups unpaid invoices according to how long they've been outstanding or overdue. Common categories include current, 1–30 days overdue, 31–60 days overdue, 61–90 days overdue, and more than 90 days overdue.
Suppose a startup has $180,000 in accounts receivable. Of that amount, $110,000 is current, $40,000 is between 1 and 30 days overdue, and $30,000 is more than 60 days overdue. The total balance tells leadership how much customers owe; the aging report reveals that a meaningful portion has already missed its expected payment date.
Regular reviews help identify customers with recurring payment problems, prioritize follow-ups, and flag balances that may require an allowance for credit losses or other accounting adjustments.
Days Sales Outstanding (DSO)
Days sales outstanding estimates how long, on average, it takes a company to collect its receivables.
A commonly used calculation is:
DSO = (Average Accounts Receivable ÷ Net Credit Sales) × Number of Days in the Period
For example, if a company has average receivables of $300,000 and $900,000 in net credit sales over a 90-day period, its DSO would be:
($300,000 ÷ $900,000) × 90 = 30 days
That suggests the company has approximately 30 days' worth of credit sales tied up in receivables.
DSO is most useful when tracked over time and compared with the company's payment terms and business model. A DSO of 45 days may be reasonable for a company offering net-45 terms, while the same figure could signal problems for a business expecting payment within 15 days. Seasonal sales and unusual billing arrangements can also affect the calculation.
Getting Customers to Pay on Time
The most effective collection practices usually begin before an invoice becomes overdue. Clear contracts, accurate invoices, and prompt billing reduce avoidable delays. Convenient payment methods can help, as can understanding how larger customers process invoices. Some require purchase orders, specific billing contacts, or electronic submission through procurement systems. Learning those requirements during onboarding can prevent weeks of unnecessary back-and-forth.
For customers who consistently pay late, a startup may need to reconsider its terms. Depending on the relationship and contract, that could mean requesting deposits, shortening payment periods for future work, or requiring outstanding balances to be resolved before accepting additional projects.
The Australian Government's guidance on payment terms recommends documenting payment expectations and maintaining a process for addressing overdue accounts. Although written for Australian businesses, those general operational principles are useful for U.S. startups as well.
Automation can handle routine reminders and invoice tracking, but disputes and repeated missed commitments still require someone to understand the circumstances. A customer who overlooked an invoice needs a different response from one who disputes the work or is experiencing financial difficulties. Consistent follow-up should be professional without being unnecessarily confrontational.
Common Accounts Receivable Mistakes
One of the most expensive mistakes is waiting too long to send invoices. A business that finishes a project on September 30 but doesn't invoice until October 15 has already added 15 days to its collection timeline before the customer has begun processing the payment.
Another is allowing overdue balances to accumulate without assigning responsibility for follow-up. When sales assumes finance is handling collections and finance assumes the account manager is managing the relationship, invoices can sit unresolved for weeks. Inaccurate customer records create similar problems. Outdated billing contacts, missing purchase order information, and unrecorded customer credits can delay payments that would otherwise be routine.
Startups should also avoid treating every outstanding invoice as equally collectible. A financially stable customer that's five days late presents a different risk from one that's disputed a balance for six months. Under applicable accounting standards, companies may need to recognize expected credit losses or adjust receivable balances to reflect collectibility.
Customer concentration deserves attention, too. If one customer represents 60% of outstanding receivables, a payment delay from that customer could have an outsized effect on cash flow. Reviewing concentration alongside aging and DSO provides a more complete picture of collection risk.
Using Receivables to Forecast Cash Flow
Revenue forecasts and cash forecasts answer different questions. A company may expect to recognize $300,000 in revenue next month, but that doesn't mean $300,000 will arrive in its bank account during the same period.
A useful short-term cash forecast considers when outstanding invoices are likely to be collected, rather than assuming every customer will pay on the due date. Suppose a startup expects $100,000 in payments over the next two weeks, but several of those customers historically pay two or three weeks late. Planning payroll or a major purchase around the full amount arriving on schedule could create an avoidable cash shortage.
Finance teams can improve forecasts by reviewing customer payment histories, identifying disputed invoices, and adjusting expected collection dates as circumstances change. Receivables should also be reviewed alongside accounts payable. Understanding when money is expected to arrive and when bills must be paid helps leadership identify potential gaps before they become urgent.
When AR Becomes Too Much to Manage Internally
As transaction volume grows, keeping AR current can require more time than the finance team has available. Billing may involve several systems, customers may have different payment requirements, and reconciliation becomes more involved. Delayed invoicing, recurring discrepancies between customer balances and deposits, and aging reports that aren't reviewed consistently can indicate that the company needs additional support.
Some businesses need help with billing and collections administration. Others need broader accounting support to ensure receivables are recorded accurately, reconciled, and reflected appropriately in financial reporting.
Those responsibilities aren't interchangeable. A provider that manages the general ledger may not contact customers about overdue invoices, while a collections service may have no responsibility for preparing financial statements. Startups should clarify the scope of any outsourced arrangement before deciding which type of support they need.
How Graphite Financial Supports Accounts Receivable
Accurate accounts receivable records are an important part of dependable financial reporting. Customer invoices, payments, credits, and outstanding balances need to be reflected correctly in the general ledger so leadership can understand the company's financial position.
Graphite Financial provides outsourced accounting and bookkeeping services for growing businesses, including general ledger management, reconciliations, and month-end close. Depending on the agreed scope of services, our team supports the accounting records associated with customer receivables and their treatment in financial reporting.
If your company needs more consistent accounting support as its financial activity becomes more complex, talk to Graphite Financial about your needs.
Frequently Asked Questions About Accounts Receivable
Is accounts receivable an asset or a liability?
Accounts receivable is generally an asset because it represents amounts customers owe the company. It appears on the balance sheet, typically among current assets, subject to appropriate allowances for amounts that may not be collected.
What's the difference between accounts receivable and accounts payable?
Accounts receivable is money customers owe your business. Accounts payable is money your business owes vendors and other creditors. Managing both helps a company understand its working capital and upcoming cash requirements.
What is a good days sales outstanding (DSO) figure?
There's no universal target. A useful DSO depends on the company's payment terms, industry, and customer mix. Comparing DSO with agreed payment terms and tracking changes over time is generally more informative than relying on a single benchmark.
How often should a startup review accounts receivable?
Many growing startups benefit from reviewing overdue invoices weekly and reconciling receivable balances monthly. Companies with substantial invoice volume or cash flow pressure may need more frequent monitoring.
What happens when a customer invoice can't be collected?
The company may need to recognize a credit loss or write off the receivable, depending on the circumstances and applicable accounting standards. Collection efforts, legal remedies, and tax treatment should be evaluated separately with appropriate professional guidance.