Accounts Receivable (AR)
What it is
Accounts receivable is the money customers owe a business for goods or services already delivered and invoiced but not yet paid. It sits on the balance sheet as a current asset, since the company expects to convert it to cash within the payment terms agreed with the customer.
Example
A SaaS company invoices a customer $12,000 on March 1 with net 30 terms. That $12,000 is recorded as revenue and as accounts receivable the same day. When the customer pays on March 28, cash goes up by $12,000 and AR goes down by the same amount. If they have not paid by April 1, the invoice is past due and still sits in AR, now flagged in the aging report.
Why it matters
AR is revenue that has been earned but is not yet in the bank. A business can be profitable on paper and still run short of cash if that gap grows, which is why the total AR balance, and how much of it is past due, is one of the first numbers a finance team looks at. Every open invoice in AR is also a pending customer interaction, whether a reminder, a dispute, or a payment.
Accounts Receivable Aging Report
What it is
An aging report groups every unpaid invoice by how long it has been outstanding, usually in 30-day buckets: current, 1 to 30 days past due, 31 to 60, 61 to 90, and over 90. The column totals show how the AR balance is distributed by age.
Example
A software company runs its aging report on the first of the month and sees $1.2M in total AR. Of that, $840,000 is current, $240,000 is 1 to 30 days late, $72,000 is 31 to 60, $36,000 is 61 to 90, and $12,000 is over 90. Seventy percent of the balance is not yet due. Ten percent, or $120,000, is more than 30 days past due, spread across nine customers, with three of them holding the $48,000 that sits beyond 60 days.
Why it matters
It is the main tool for prioritizing collections. Without it, a team either chases every invoice equally or chases none. The report also feeds the allowance for doubtful accounts, since older buckets carry higher expected loss rates. A common benchmark is having 80% or more of AR in the current and 1 to 30 buckets and under 5% beyond 90 days.
Accounts Receivable Automation
What it is
AR automation uses software to handle the repetitive work of getting paid: sending invoices, scheduling reminders based on due dates, giving customers a portal to view and pay invoices, matching incoming payments to invoices, and reporting on the results.
Example
A company with 800 customers and 2,000 open invoices has two people spending most of their week on reminders and cash matching. After automating, reminder sequences run on their own, 90% of payments match automatically, and those two people spend their time on the 40 accounts that are seriously late.
Why it matters
Late payment is rarely a question of willingness. It comes from problems upstream: an invoice sent to the wrong contact, a purchase order number missing, a dispute nobody logged, and from the absence of a structure for what happens next. Most teams have no defined, repeatable process for when an invoice hits 7 days overdue, or 30, or when a customer stops replying, so follow-up depends on whoever remembers. Automation puts that structure in place and runs it the same way every time. It does not remove people from the process; it removes the administrative work so the team can spend its time on disputes, large overdue balances, and strategic accounts.
Accounts Receivable Turnover Ratio
What it is
The AR turnover ratio measures how many times a company collects its average receivables balance in a period. A higher ratio means customers pay faster.
Here’s how to calculate it
Accounts receivable turnover ratio = Net credit sales ÷ Average accounts receivable
Example
A company records $6M in annual credit sales. AR was $700K at the start of the year and $900K at the end, so average AR is $800K. The turnover ratio is 6,000,000 / 800,000 = 7.5, meaning receivables were collected 7.5 times that year. Dividing 365 by 7.5 gives an average collection period of about 49 days.
Why it matters
The number is most useful compared to prior periods or to the company’s own payment terms: 7.5 is strong for a business on net 60 and weak for one on net 15. A falling ratio means customers are taking longer to pay, credit is being extended too freely, or both.
Allowance for Doubtful Accounts
What it is
The allowance for doubtful accounts is an estimate of the receivables a company expects it will not collect. It is a contra-asset account that reduces gross AR to net realizable value on the balance sheet, with the matching entry recorded as bad debt expense.
Here’s how to calculate it
The most common method applies a loss rate to each bucket of the aging report, with older buckets carrying higher rates. When a specific invoice is later confirmed uncollectible, it is written off against the allowance rather than as a new expense.
Example
A company has $500K in current receivables, $150K in the 1 to 30 bucket, $60K in 31 to 60, $30K in 61 to 90 and $20K over 90 days. Applying loss rates of 1%, 3%, 10%, 25% and 60% gives an allowance of $35,000. Gross AR is $760K; net AR on the balance sheet is $725K.
Why it matters
Without it the balance sheet overstates assets and the income statement overstates profit. For AR teams, a rising allowance relative to sales is a signal that credit decisions or collections are slipping.
Autopay
What it is
Autopay is an arrangement where a customer authorizes a supplier to charge a stored payment method, typically a bank account via direct debit or a card, automatically when each invoice falls due. The customer pays on time without taking any action.
Example
A marketing agency bills a client $4,500 on the first of every month. The client enrolls in autopay through the agency’s payment portal and links their business bank account. Each month the invoice goes out on the first, the payment is pulled three days later, and the client’s balance is always zero by the fifth.
Why it matters
Most late payments happen because someone has to open, approve and key in the payment. Autopay removes that step, so customers on autopay pay on time close to 100% of the time and the supplier’s cash becomes predictable. Adoption depends on making enrollment quick and giving customers clear notice before each charge.
Average Collection Period
What it is
The average collection period estimates the average number of days a company takes to collect payment after making a credit sale.
Example
A company records $6M in annual credit sales. AR was $700K at the start of the year and $900K at the end, so average AR is $800K. The turnover ratio is 6,000,000 / 800,000 = 7.5, meaning receivables were collected 7.5 times that year. Dividing 365 by 7.5 gives an average collection period of about 49 days.
Why it matters
The number is most useful compared to prior periods or to the company’s own payment terms: 7.5 is strong for a business on net 60 and weak for one on net 15. A falling ratio means customers are taking longer to pay, credit is being extended too freely, or both.
Average Days Delinquent (ADD)
What it is
Average days delinquent measures how many days, on average, invoices are paid after their due date. Unlike DSO, it strips out the payment terms and looks only at the delay beyond them.
How to calculate it
Average days delinquent = DSO − Best possible DSO
Example
A company’s DSO is 52 days. Its best possible DSO, based on its payment terms and current receivables, is 38 days. ADD is 14: customers pay two weeks late on average. If the company shortened its terms, DSO would fall but ADD would stay at 14 unless customers changed how they pay.
Why it matters
Because it cannot be improved by changing terms, ADD is the cleanest measure of collections performance. It also allows fair comparison between customers on different terms. Under 10 days is strong for most B2B companies.
Bad Debt
What it is
Bad debt is a receivable that a company has determined it will not collect, because the customer has gone into liquidation, disappeared, or refused to pay after all reasonable efforts. Once identified, it is written off, usually against the allowance for doubtful accounts.
Example
A distributor has $18,000 across three invoices with a retail customer. The retailer files for bankruptcy four months later. Having already provided for expected losses, the distributor writes off the $18,000 against its allowance. If the bankruptcy process later returns $2,000, that is recorded as a recovery.
Why it matters
Bad debt is the most direct cost of poor credit and collections. On a 10% net margin, a $10,000 write-off wipes out the profit on $100,000 of sales. Most bad debt does not come from customers who could never pay; it comes from invoices left unattended until the customer’s situation changed. Most B2B companies aim to keep bad debt under 1% of revenue.
Bad Debt Ratio
What it is
The bad debt ratio shows what percentage of credit sales became uncollectible during a given period.
How to calculate it
Bad debt ratio = Bad debt expense ÷ Net credit sales × 100
Example
A company records $20,000 in bad debt against $2 million in annual credit sales. Its bad debt ratio is 1%.
Why it matters
Tracking the ratio over time helps a business assess the effectiveness of its credit and collections policies. A rising ratio can indicate deteriorating customer quality, ineffective follow-ups, or excessive credit exposure.
Best Possible DSO
What it is
Best possible days sales outstanding, or BPDSO, estimates the lowest DSO a company could achieve if every customer paid on time. It uses current receivables and excludes overdue balances.
How to calculate it
Best possible DSO = Current receivables ÷ Net credit sales × Number of days
Example
A company has $150,000 in current receivables and $1.8 million in quarterly credit sales. Over a 90-day quarter, its best possible DSO is 7.5 days.
Why it matters
Comparing actual DSO with best possible DSO helps isolate collection delays. A widening gap suggests that overdue invoices are accumulating and the collection process may need attention.
Billing Cohort
What it is
A billing cohort groups invoices according to when they were issued and tracks how quickly each group is collected. A cohort analysis might show what percentage of invoices raised in January were collected within 30, 60, or 90 days.
How to calculate it
Cohort collection rate = Amount collected from the cohort ÷ Total amount billed in the cohort × 100
Example
A company issued $500,000 in invoices during January. It collected $350,000 within 30 days and another $100,000 within 60 days. The January cohort was therefore 70% collected within 30 days and 90% collected within 60 days.
Why it matters
Billing cohorts reveal changes in collection performance that aggregate metrics can hide. Finance teams can compare cohorts across months and identify whether newer invoices are being collected more efficiently.
Cash Application
What it is
Cash application is the process of matching incoming payments to the invoices they settle and recording them in the accounting system. A bank deposit arrives with an amount, a date and sometimes a reference; the AR team has to identify the payer, work out which invoices the payment covers, and post it against them.
Example
A customer sends $14,250 with the reference “INV Aug”. Their open August invoices total $15,000 across three invoices: $6,000, $5,000 and $4,000. The remittance email shows a $750 deduction for a damaged shipment on the $4,000 invoice. The team applies the first two in full, $3,250 to the third, and raises a dispute for the $750 balance.
Why it matters
Until a payment is applied, the invoice still looks unpaid, so the customer may be chased for money they have already sent, the aging report overstates overdue balances, and DSO is inflated. Manual cash application is one of the largest time costs in AR; automating it typically matches 80 to 95% of payments without human input.
Cash Collection
What it is
Cash collection is the process of turning issued invoices into money in the bank. It covers everything that happens after an invoice is sent: reminders, customer conversations, dispute resolution, receiving the payment, and applying it to the right invoice. In accounting terms it is the back half of the order-to-cash cycle.
Example
A logistics company issues 600 invoices a month on net 30 terms. Over the following weeks its finance team sends reminders as due dates approach and pass, answers questions about specific invoices, resolves a handful of pricing disputes, and matches the payments that arrive by bank transfer and card against the open invoices. By the end of the cycle, 92% of the month’s invoices are paid, and the remaining 8% carry into the next month’s work.
Why it matters
Revenue is recognized when an invoice is issued, but a company pays salaries and suppliers out of collected cash. The quality of cash collection determines how much of the revenue on the income statement is actually available to run the business, and how soon. It is also the most frequent point of contact between a company and its customers after the sale, so how it is done shapes the relationship.
Cash Conversion Cycle
What it is
The cash conversion cycle measures how many days pass between a company paying for inputs and receiving cash from customers for the resulting sales. It combines inventory, receivables and payables into one figure showing how long cash is tied up in operations.
How to calculate it
Cash conversion cycle = Days inventory outstanding + Days sales outstanding − Days payable outstanding
Example
A manufacturer holds inventory for 40 days on average, collects from customers 45 days after invoicing, and pays its own suppliers after 30 days. Its cash conversion cycle is 40 + 45 − 30 = 55 days. Cash leaves the business for materials and does not return from customers until 55 days later. A SaaS company with a DSO of 42 and a DPO of 35 has a cycle of 7 days.
Why it matters
The longer the cycle, the more working capital a company needs to fund the gap, either from its own reserves or from borrowing. Of the three components, DSO is the one finance teams have the most direct control over: inventory depends on operations and DPO depends on supplier relationships, but collecting faster is an internal process decision. Reducing DSO by ten days shortens the cycle by ten days.
Cash Forecasting
What it is
Cash forecasting is the process of predicting how much cash a company will have at future points in time by estimating the inflows and outflows expected between now and then. On the receivables side, it means predicting when open invoices will actually be paid, as opposed to when they are due.
How to calculate it
Forecast closing cash = Opening cash + Forecast cash inflows − Forecast cash outflows
Example
A company starts the month with $300,000. It expects to collect $500,000 from customers and spend $650,000 on payroll, suppliers, and other obligations. Its forecast closing balance is $150,000.
Why it matters
A forecast helps finance teams anticipate cash shortages and make informed decisions about spending or financing. Accurate predictions about when invoices will be paid make the forecast more reliable.
Cash Forecasting
What it is
Cash forecasting is the process of predicting how much cash a company will have at future points in time by estimating the inflows and outflows expected between now and then. On the receivables side, it means predicting when open invoices will actually be paid, as opposed to when they are due.
How to calculate it
Forecast closing cash = Opening cash + Forecast cash inflows − Forecast cash outflows
Example
A company starts the month with $300,000. It expects to collect $500,000 from customers and spend $650,000 on payroll, suppliers, and other obligations. Its forecast closing balance is $150,000.
Why it matters
A forecast helps finance teams anticipate cash shortages and make informed decisions about spending or financing. Accurate predictions about when invoices will be paid make the forecast more reliable.
Collection Effectiveness Index (CEI)
What it is
The collection effectiveness index measures what percentage of the receivables that were available to collect in a period actually got collected. Unlike DSO, it compares performance against what was collectable rather than against revenue, so it is less distorted by sales growth or seasonality.
How to calculate it
CEI = (Beginning receivables + Credit sales − Ending total receivables) ÷ (Beginning receivables + Credit sales − Ending current receivables) × 100
Example
A company starts the month with $500,000 in receivables and invoices $300,000 during it. At month end, total receivables are $350,000, of which $250,000 is current. CEI is (500,000 + 300,000 − 350,000) / (500,000 + 300,000 − 250,000) × 100 = 450,000 / 550,000 × 100 = 81.8%. The company collected just under 82% of what was collectable that month.
Why it matters
A CEI of 100% means every collectable dollar was collected. Because CEI is expressed as a percentage of what was possible, it is a fairer measure of a collections team’s performance than DSO, which can rise simply because the company sold more or extended longer terms.
Collections Strategy
What it is
A collections strategy is the defined set of rules for how a company follows up on unpaid invoices: which customers get what kind of communication, through which channel, at what point before and after the due date, and what happens when the customer does not respond. It replaces ad hoc chasing with a process that runs the same way every time.
Example
A software company groups customers into three segments by contract value. Small accounts receive an automated email reminder three days before the due date, another on the due date, and further emails at 7, 14 and 30 days overdue. Mid-size accounts follow the same sequence with a phone call added at 14 days. Enterprise accounts receive a personal email from their account manager before the due date and a call from finance at 7 days. Any account at 45 days overdue is placed on credit hold.
Why it matters
Without a strategy, follow-up depends on who has time and who remembers, so some customers are chased twice and others not at all. A defined strategy makes collections predictable for the company and consistent for the customer, who knows what to expect and when. It also allows the process to be measured, since a sequence that is applied the same way to every account can be tested and adjusted.
Credit Hold
What it is
A credit hold is a block placed on a customer account that stops new orders, shipments or service from being fulfilled until an overdue balance is paid or a credit issue is resolved. It is one of the few levers a supplier has to change a non-paying customer’s priorities.
Example
A distributor’s terms state that accounts more than 45 days overdue are placed on hold. A retail customer with $28,000 past 45 days places a new $15,000 order. The order is accepted by the sales system but flagged and held in fulfilment. The customer’s buyer receives a notification that the order will ship once the overdue balance is settled, and the payment arrives within a week.
Why it matters
For a customer that depends on the supplier, a credit hold turns an overdue invoice from an accounting matter into an operational one, which is often what it takes to get it paid. The risk is on the relationship side: a hold applied without warning, or on a customer whose delay was caused by the supplier’s own error, damages trust and can lose the account. Clear, communicated rules about when holds apply make them far less contentious.
Credit Limit
What it is
A credit limit is the maximum amount a supplier is willing to have outstanding with a customer at any one time. New orders that would push the customer’s open balance above the limit are reviewed or held until existing invoices are paid.
Example
A supplier sets a $50,000 credit limit for a new customer based on its trade references and financial statements. The customer places orders totalling $42,000 in its first month, all unpaid. A further $12,000 order would take the balance to $54,000, above the limit, so it is held for review. After the customer pays its first $20,000 invoice, the order is released.
Why it matters
The credit limit caps how much a supplier stands to lose if a customer fails to pay. Set too low, it constrains sales to customers who would have paid. Set too high, or never reviewed, it allows a customer’s exposure to grow quietly until a default becomes a serious loss. Limits are most effective when they are revisited as payment behavior and business size change.
Credit Memo
What it is
A credit memo, also called a credit note, is a document a supplier issues to reduce the amount a customer owes on an existing invoice. It is used to correct billing errors, account for returned goods, apply agreed discounts, or settle disputes without reissuing the original invoice.
Example
A customer is invoiced $9,000 for 300 units. On delivery, 20 units are found to be damaged. The supplier issues a credit memo for $600, the value of the damaged units, referencing the original invoice. The customer’s balance for that invoice drops to $8,400, and the credit memo appears on their account as a separate document linked to it.
Why it matters
Credit memos keep the invoice record intact and traceable while allowing the amount owed to change. They also matter for collections: an invoice that is disputed over a $600 shortfall may go unpaid in full until the credit memo is issued, so slow credit memo processing directly delays cash. Tracking credit memo volume by cause also shows where billing or delivery errors are recurring.
Credit Risk
What it is
Credit risk is the possibility that a customer will not pay what it owes, either in full or on time. Every sale made on payment terms carries it. Assessing credit risk is the process of estimating that possibility for a given customer before extending credit and while the relationship continues.
Example
Before onboarding a new customer, a supplier reviews its filed financial statements, checks a credit bureau score, requests two trade references, and looks at how long it has been operating. The customer is a five-year-old business with a moderate credit score and one reference reporting occasional late payment. The supplier assigns a credit limit of $25,000 and net 30 terms, with a review scheduled after six months of payment history.
Why it matters
Credit risk is the reason collections exist as a function. A supplier that assessed every customer perfectly would have no bad debt and few late payments. In practice, assessment is imperfect and a customer’s situation changes over time, so credit risk has to be managed at both ends: at onboarding, through limits and terms, and continuously, through watching payment behavior for signs that a previously reliable customer is starting to slip.
Credit Terms
What it is
Credit terms define when and how a customer must pay for a credit purchase. They usually specify the payment deadline and may include discounts, fees, or accepted payment methods.
Example
An invoice with Net 30 terms must be paid within 30 days of the invoice date.
Why it matters
Credit terms influence when sales become cash. Longer terms can support customer relationships while increasing the amount of working capital tied up in receivables.
Customer Portal
What it is
A customer portal is an online space where customers can view invoices, check their outstanding balance, and make payments. It may also allow them to download documents or raise disputes.
Example
A customer receives a reminder containing a portal link. They open the portal, review three outstanding invoices, and pay the total balance by bank transfer.
Why it matters
A portal removes friction from the payment process by giving customers one place to find the information they need. It can reduce payment delays caused by missing invoices or unclear payment instructions.
Customer Statement
What it is
A customer statement, or statement of account, is a summary of all activity on a customer’s account over a period: invoices issued, payments received, credit memos applied, and the resulting balance. It is sent periodically, usually monthly, and shows the customer everything they owe in one document rather than invoice by invoice.
Example
At the end of September, a supplier sends a statement to a customer showing an opening balance of $18,000, four new invoices totaling $22,500, two payments totaling $26,000, a credit memo of $400, and a closing balance of $14,100. The statement lists each open invoice with its date, due date and amount, and marks the two that are past due.
Why it matters
Customers with many invoices often lose track of which ones are paid, which is a common cause of late payment that has nothing to do with willingness. A statement gives their accounts payable team a single reference to reconcile against. It also surfaces discrepancies early: if the customer’s records show a payment the statement does not, the mismatch gets investigated in October rather than discovered in a dispute in December.
Days Beyond Terms (DBT)
What it is
Days beyond terms measures how many days past the due date a customer pays, on average. It is essentially the same concept as average days delinquent, but it is usually calculated at the individual customer level and is the standard measure used by credit bureaus to describe a company’s payment behavior.
How to calculate it
Days beyond terms = Actual payment date − Invoice due date
Example
A customer paid three invoices in the quarter: $10,000 paid 5 days late, $20,000 paid 12 days late, and $5,000 paid 3 days early. The value-weighted DBT is (10,000 × 5 + 20,000 × 12 + 5,000 × −3) / 35,000 = (50,000 + 240,000 − 15,000) / 35,000 = 7.9 days. A credit bureau report on this customer would show a DBT of around 8.
Why it matters
DBT is how the market describes a company’s payment reliability. Suppliers use a prospective customer’s DBT from a bureau report to set terms and limits, and a company’s own DBT affects the terms it is offered by its suppliers. Internally, tracking DBT per customer shows who pays close to terms and who routinely runs late, which is a more useful basis for segmenting collections than contract size alone.
Days Sales Outstanding (DSO)
What it is
Days sales outstanding, or DSO, measures the average number of days a company takes to collect payment after making a credit sale. It is also called AR days or debtor days.
How to calculate it
Standard formula
DSO = Accounts receivable ÷ Credit sales × Number of days
Upflow’s countback method
Upflow uses the countback method, which works backward through monthly sales until the current accounts receivable balance is covered. This method accounts for fluctuations in billing volume.
For example, a company has $21,000 in receivables:
July sales cover $10,000, adding 31 days.
June sales cover $4,000, adding 30 days.
The remaining $7,000 represents 70% of May’s $10,000 sales, adding 21.7 days.
Countback DSO = 31 + 30 + 21.7 = 82.7 days
Example
Over a 90-day quarter, a company records $4.5M in credit sales. At quarter end its accounts receivable balance is $1.2M. DSO is (1,200,000 / 4,500,000) × 90 = 24 days. On average, an invoice issued during the quarter took 24 days to be paid.
Why it matters
DSO converts an abstract AR balance into a number anyone can interpret: how long cash is sitting with customers. A rising DSO means cash is coming in more slowly, which either increases the working capital the business needs or reduces what it has available. DSO has a known limitation, which is that it mixes payment terms with late payment. A company on net 60 will always show a higher DSO than one on net 30, even if both are paid on time. Best possible DSO and average days delinquent exist to separate the two.
Deduction
What it is
A deduction occurs when a customer pays less than the invoiced amount because they believe they are entitled to reduce the payment. Common reasons include damaged goods, incorrect pricing, or an agreed discount.
Example
A customer receives a $10,000 invoice but pays $9,500 because $500 worth of products arrived damaged. The unpaid $500 becomes a deduction that requires investigation.
Why it matters
Unresolved deductions leave invoices partially open and can distort AR reporting. A structured deduction process helps teams determine whether the balance should be collected or adjusted.
Delinquent Account
What it is
A delinquent account is a customer account with one or more payments that remain outstanding beyond their due dates.
Example
A customer has three unpaid invoices that are 15, 35, and 70 days overdue. The account is delinquent even if the customer continues placing new orders.
Why it matters
Delinquent accounts create collection risk and may require closer monitoring. Finance teams may adjust the customer’s credit limit or suspend additional credit until payment is received.
Direct Debit
What it is
Direct debit is a payment method where the customer authorizes the supplier to pull funds directly from their bank account. Once the mandate is in place, the supplier initiates each payment; the customer does not need to act. In the US the rail is ACH, in the eurozone it is SEPA Direct Debit, and in the UK it is Bacs.
Example
A SaaS company offers direct debit as a payment option at onboarding. A customer signs a SEPA mandate through the payment portal, which takes about a minute. From then on, each monthly invoice for €3,200 is collected automatically on its due date, with the customer notified two days in advance. The company receives the funds three business days after initiating the pull.
Why it matters
Direct debit is the cheapest way to collect recurring B2B payments and the most reliable for on-time payment, because it removes the customer’s action from the process. Fees are a fraction of card processing costs, which matters at invoice values of thousands rather than tens. The trade-offs are settlement time, typically two to five business days, and the customer’s right to reverse a payment within a set window, which makes clear pre-notification important.
Dispute Management
What it is
Dispute management is the process of recording, investigating, and resolving customer objections that prevent an invoice from being paid.
Example
A customer disputes an invoice because the purchase order number is incorrect. The AR team assigns the issue to the billing department, corrects the document, and sends the updated invoice.
Why it matters
Disputes often require input from teams outside finance. A clear workflow reduces resolution time and prevents invoices from remaining unpaid because ownership is unclear.
Dispute Management
What it is
Dispute management is the process of recording, investigating, and resolving customer objections that prevent an invoice from being paid.
Example
A customer disputes an invoice because the purchase order number is incorrect. The AR team assigns the issue to the billing department, corrects the document, and sends the updated invoice.
Why it matters
Disputes often require input from teams outside finance. A clear workflow reduces resolution time and prevents invoices from remaining unpaid because ownership is unclear.
Dunning
What it is
Dunning is the process of communicating with customers about unpaid invoices, from the first reminder before the due date through to escalating notices as an invoice becomes more overdue. The term covers the full sequence of messages, not just the late-stage ones.
Example
A company’s dunning sequence for a standard invoice starts with a friendly reminder five days before the due date, followed by a notice on the due date. If unpaid, further messages go out at 7 days overdue, 15 days, and 30 days, each firmer in tone and the last one stating that the account will be placed on hold. Every message includes a link to the invoice and a way to pay or raise a question.
Why it matters
The word has an old-fashioned, adversarial ring to it, and dunning done badly earns that reputation. Done well, it is a service: most customers who pay late have simply lost track, and a timely reminder with a payment link is helpful rather than hostile. A structured sequence ensures no invoice goes unmentioned and the tone escalates in proportion to how late the payment is.
Dunning Letter
What it is
A dunning letter is a formal written notice sent to a customer about an overdue invoice. Historically a physical letter, it is now usually an email, but the term still implies a more formal communication than a routine reminder, typically used at later stages of the dunning sequence.
Example
A customer is 45 days overdue on a $22,000 invoice and has not responded to three email reminders. The supplier sends a dunning letter, addressed to the customer’s finance director, that references the invoice number and amount, states the number of days overdue, lists the previous contact attempts by date, and gives a deadline of 10 days for payment before the account is suspended and the matter referred to a collections agency.
Why it matters
A dunning letter serves two purposes. It signals a shift in seriousness that a routine reminder does not, which is often enough to prompt payment from a customer who has been deprioritizing the invoice. It also creates a documented record, which matters if the debt later goes to an agency or to court, where evidence of reasonable attempts to collect is usually required.
Dunning Letter
What it is
A dunning letter is a formal written notice sent to a customer about an overdue invoice. Historically a physical letter, it is now usually an email, but the term still implies a more formal communication than a routine reminder, typically used at later stages of the dunning sequence.
Example
A customer is 45 days overdue on a $22,000 invoice and has not responded to three email reminders. The supplier sends a dunning letter, addressed to the customer’s finance director, that references the invoice number and amount, states the number of days overdue, lists the previous contact attempts by date, and gives a deadline of 10 days for payment before the account is suspended and the matter referred to a collections agency.
Why it matters
A dunning letter serves two purposes. It signals a shift in seriousness that a routine reminder does not, which is often enough to prompt payment from a customer who has been deprioritizing the invoice. It also creates a documented record, which matters if the debt later goes to an agency or to court, where evidence of reasonable attempts to collect is usually required.
Early Payment Discount
What it is
An early payment discount is a reduction in the invoice amount offered to customers who pay before the standard due date. It is expressed in shorthand on the invoice: “2/10 net 30” means a 2% discount if paid within 10 days, otherwise the full amount is due at 30.
How to calculate it
The annualized cost of the discount to the supplier: (Discount % / (100 − Discount %)) × (365 / (Standard terms − Discount period))
Example
A supplier offers 2/10 net 30 on a $50,000 invoice. A customer who pays on day 10 pays $49,000. The supplier receives the cash 20 days earlier than it otherwise would, at a cost of $1,000. Annualized, that works out to (2 / 98) × (365 / 20) = 37.2%, the effective rate the supplier is paying to accelerate the cash.
Why it matters
An early payment discount can accelerate cash collection and reduce collection work. The value of receiving cash sooner should be weighed against the revenue given up through the discount.
Electronic Funds Transfer
What it is
An electronic funds transfer, or EFT, is the electronic movement of money between bank accounts. Examples include ACH payments, direct debits, and wire transfers.
Example
A customer authorizes an ACH transfer from its bank account to settle a $25,000 invoice.
Why it matters
Electronic transfers can make B2B payments faster and easier to track. Accurate payment references remain important because they help the recipient match the transfer with the correct customer and invoices.
Factoring
What it is
Factoring is a financing arrangement in which a business sells its unpaid invoices to a third party called a factor. The factor advances most of the invoice value and may take responsibility for collecting from the customer.
Example
A business sells a $100,000 invoice to a factor and immediately receives a 90% advance. The factor collects the invoice and remits the remaining balance after deducting its fees.
Why it matters
Factoring provides access to cash before customers pay. It can also affect margins and customer relationships, especially when the factor manages collections directly.
Financial Relationship Management (FRM)
What it is
Financial Relationship Management, or FRM, is the discipline of managing the financial relationship with a customer, from the moment payment terms are agreed until cash is collected and reconciled.
It brings customer context into financial interactions such as collections, payments, and dispute resolution. Finance, Sales, and Customer Success work from the same information to give the customer a consistent experience.
Example
A software company’s finance and customer success teams work from the same view of each account. When a customer’s payments start arriving later than usual, customer success sees it alongside product usage and support tickets. When a customer disputes an invoice, the account manager knows before the next renewal conversation. Payment terms, reminder cadence and communication tone are set per customer based on the value and history of the relationship, rather than one process for everyone.
Why it matters
Getting paid is part of the customer relationship. Generic reminders and disconnected communication can create friction, especially when different teams contact the customer without shared context.
FRM helps businesses collect cash more effectively while protecting the relationships behind their revenue. Every financial interaction adapts to the customer and considers what has already been paid, promised, discussed, or disputed.
Invoice
What it is
An invoice is the document a supplier issues to request payment for goods or services delivered. It states what was provided, the amount owed, the payment terms, the due date, and how to pay. Once issued, it creates a receivable in the supplier’s books and a payable in the customer’s.
Example
A consultancy completes a project phase and issues an invoice for $36,000. The invoice carries a unique number, the issue date, the customer’s purchase order reference, a line-item description of the work, the subtotal, applicable tax, the total due, net 30 payment terms, the resulting due date, and the supplier’s bank details alongside a link to pay by card.
Why it matters
The invoice is where most payment delays begin. A missing PO number, a wrong billing contact, an unclear description or an absent payment link each add days or weeks before the customer’s AP team can process it. An invoice that is accurate, complete and easy to pay is the single most effective collections tool a company has, because it removes the reasons for delay before any reminder is needed.
Invoice Date
What it is
The invoice date is the date an invoice is officially issued. It often serves as the starting point for calculating the payment deadline.
Example
An invoice dated March 1 with Net 30 terms is due on March 31, depending on the contract’s method for counting days.
Why it matters
An incorrect invoice date can produce an inaccurate due date and delay collection activity. Issuing invoices promptly also ensures that the payment period begins as early as possible.
Invoice Dispute
What it is
An invoice dispute is a customer’s formal objection to all or part of an invoice. Common causes include pricing that does not match the contract, quantities that do not match what was delivered, service that was not performed as agreed, duplicate billing, or missing information the customer needs to process payment.
Example
A customer receives a $15,000 invoice for a software licence and raises a dispute: the contract specifies a 10% volume discount that was not applied. The invoice is flagged as disputed, the dispute is assigned to the account manager, and the customer’s AP team holds payment on the full amount. After the pricing is confirmed, a credit memo for $1,500 is issued and the customer pays $13,500.
Why it matters
A disputed invoice is not late in the usual sense: the customer is often willing to pay and is waiting on the supplier. Reminders sent during a dispute irritate the customer and achieve nothing. The time it takes to resolve disputes is therefore a direct driver of DSO, and dispute volume by cause shows where upstream processes in pricing, delivery or billing are producing errors that end up as collections work.
Invoice Factoring
What it is
Invoice factoring is the sale of a company’s receivables to a third party, the factor, at a discount. The factor pays the company most of the invoice value upfront, typically 80% to 90%, collects the full amount from the customer when it falls due, and then remits the remainder minus its fee.
Example
A staffing agency has $200,000 in invoices due in 45 days but needs cash now to make payroll. It sells the invoices to a factor, which advances $170,000 immediately. The factor collects the $200,000 from the agency’s customers over the following weeks and pays the agency a further $24,000, keeping $6,000, or 3%, as its fee.
Why it matters
Factoring converts receivables into cash immediately, which can be the difference between meeting payroll and not for a fast-growing or thinly capitalized business. It is expensive, with fees of 1% to 5% per invoice that annualize into high rates, and in most arrangements the factor takes over collections, so customers deal with a third party rather than the supplier. Companies that rely on factoring long term are usually paying a steep price for a collections process they could improve themselves.
Invoice Financing
What it is
Invoice financing is borrowing against unpaid invoices. The company uses its receivables as collateral for a loan or credit line, keeps ownership of the invoices, and continues to collect from its customers itself. It is the borrowing alternative to factoring, which involves selling the invoices outright.
Example
A manufacturer has $500,000 in receivables and arranges an invoice financing facility with a lender that advances up to 85% of eligible invoices. It draws $300,000 against the facility to fund a large materials purchase. As its customers pay their invoices over the next two months, the manufacturer repays the draw plus interest at an annualized rate of around 12%.
Why it matters
Invoice financing gives a company access to cash tied up in receivables without handing its customer relationships to a third party, which is the main objection to factoring. The cost is interest and fees, and the facility is usually limited to invoices from creditworthy customers that are not yet overdue. As with factoring, a heavy or growing dependence on it usually points to a DSO problem that would be cheaper to fix directly.
Invoice Matching
What it is
Invoice matching identifies which invoice or combination of invoices an incoming payment is intended to settle. It is a central part of cash application.
Example
A customer sends a $30,000 payment covering two $10,000 invoices and one $12,000 invoice with a $2,000 credit note. Invoice matching connects the payment and adjustment with the correct documents.
Why it matters
Accurate matching keeps customer balances current and reduces unapplied cash. It also prevents collectors from following up on invoices that customers have already paid.
Late Payment
What it is
A late payment is a payment received after the invoice’s contractual due date.
Example
An invoice was due on April 30, and the customer paid on May 12. The payment was 12 days late.
Why it matters
Late payments tie up working capital and increase the effort required to collect revenue. Persistent delays can also increase financing costs and the risk of bad debt.
Late Payment Fee
What it is
A late payment fee is a charge added to an invoice that is not paid by its due date. It may be a fixed amount, a percentage of the invoice, or interest accruing daily. Many jurisdictions set statutory rates that suppliers are entitled to charge, and the terms should be stated on the invoice and in the contract.
Example
A supplier’s terms specify a late fee of 1.5% per month on overdue balances. A customer pays a $20,000 invoice 40 days after the due date. The supplier issues a separate invoice for the late fee of $20,000 × 1.5% × (40 / 30) = $400. The customer’s AP team queries it, the supplier points to the signed terms, and the fee is paid the following month.
Why it matters
Late fees exist to shift the cost of late payment from the supplier, who has been funding the customer’s working capital, to the customer who caused it. In practice many suppliers state them and rarely enforce them, because the fee is small relative to the relationship and chasing it creates friction. Where they are enforced consistently, they change payment behavior over time. Where they are enforced inconsistently, they mainly generate disputes.
Lockbox
What it is
A lockbox is a service provided by a bank in which customers send payments to a dedicated post office box the bank controls. The bank collects the mail, opens it, deposits the checks, and sends the company a file with the payment details and images of the remittance documents. It is used mainly in the US, where check payments remain common in B2B.
Example
A distributor receives 400 check payments a month from customers across the country. Rather than have staff open envelopes, key in payment details and take checks to the bank, it directs customers to a lockbox address. The bank processes each day’s mail, deposits the funds by the afternoon, and transmits a file the distributor’s AR team uses to apply payments the same day.
Why it matters
For companies still paid heavily by check, a lockbox cuts the time between a customer mailing a payment and the cash being available by several days and removes a large amount of manual handling. It does not solve cash application by itself: the remittance data still has to be matched to invoices, and check payments often arrive with incomplete or handwritten references. The broader trend is toward electronic payment methods that make the lockbox unnecessary.
Net Credit Sales
What it is
Net credit sales represent sales made on credit after subtracting returns, allowances, and applicable discounts. Cash sales are excluded.
How to calculate it
Net credit sales = Gross credit sales − Returns − Allowances − Discounts
Example
A business records $500,000 in gross credit sales. It also records $20,000 in returns, $5,000 in allowances, and $10,000 in discounts. Its net credit sales are $465,000.
Why it matters
Net credit sales show the revenue generated through credit transactions that the business expects to collect. The figure is also used when calculating AR turnover and DSO.
Net Payment Terms
What it is
Net payment terms specify the number of days a customer has to pay the full invoice amount. Common examples include Net 15, Net 30, and Net 60.
Example
An invoice issued on May 1 with Net 30 terms is generally due on May 31.
Why it matters
Net terms directly affect cash-collection timing and working-capital requirements. Longer terms give customers more time to pay, while shorter terms allow the supplier to collect cash sooner.
Open Invoice
What it is
An open invoice is an invoice that has been issued and has an unpaid balance. It may still be within its payment terms or already overdue.
Example
A $10,000 invoice has received a partial payment of $4,000. It remains open with a balance of $6,000.
Why it matters
Tracking open invoices provides an accurate view of the amounts that still need to be collected. Open invoices form the basis of a company’s AR balance and collection workload.
Order to Cash (O2C)
What it is
Order to cash is the end-to-end business process that begins when a customer places an order and ends when the resulting payment is received and recorded. It spans order entry, credit approval, fulfilment, invoicing, collections, cash application and reporting, crossing sales, operations and finance.
Example
A customer signs a $60,000 annual software contract. The order is entered, the customer’s credit is approved, and the account is provisioned. Finance issues the invoice on net 30 terms. Reminders go out as the due date approaches. The customer pays by bank transfer on day 34. The payment is matched to the invoice, the receivable is closed, and the revenue and cash are reported for the period. The cycle, from signature to cash applied, took 38 days.
Why it matters
Late payment problems are often diagnosed as collections problems when they originate earlier in the O2C cycle: an order entered with the wrong billing entity, a credit check that was skipped, an invoice issued a week after delivery. Looking at the whole process rather than the collections step alone is how companies find the actual cause. The cycle also defines where the handoffs are between sales, operations and finance, which is where information tends to get lost.
Outstanding Balance
What it is
An outstanding balance is the total unpaid amount on an invoice or customer account. It can include current invoices and overdue invoices.
How to calculate it
A simplified calculation is:
Outstanding balance = Total invoiced amount − Applied payments − Applied credits
Example
A customer owes $20,000 across three invoices and has a $2,000 unapplied credit. Depending on the company’s accounting treatment, the net outstanding balance may be $18,000.
Why it matters
The outstanding balance tells finance teams how much cash remains to be collected. Account-level balances also give customers a clearer view of their total payment obligation.
Outstanding Invoice
What it is
An outstanding invoice is an invoice with an amount that has yet to be paid in full. It can be current or overdue.
Example
A $25,000 invoice is due next week and remains unpaid. It is outstanding even though the payment deadline has not passed.
Why it matters
Outstanding invoices represent revenue that has been recognized but has yet to become cash. Monitoring them helps finance teams plan future collections and identify upcoming risks.
Overdue Invoice
What it is
An overdue invoice is an unpaid invoice whose due date has passed.
How to calculate it
Days overdue = Current date − Invoice due date
Example
An invoice was due on June 1 and remains unpaid on June 10. It is nine days overdue.
Why it matters
Overdue invoices require collection activity and can place pressure on cash flow. The likelihood of collection can also decline as invoices become older.
Partial payment
What it is
A partial payment occurs when a customer pays part of an invoice while leaving the remaining amount outstanding.
How to calculate it
Remaining invoice balance = Original invoice amount − Applied payment
Example
A customer pays $8,000 toward a $10,000 invoice. The invoice remains open with an outstanding balance of $2,000.
Why it matters
Partial payments improve immediate cash flow while requiring the AR team to track and collect the remaining balance. They may result from an agreed payment plan, a short payment, or a dispute.
Past Due Invoice
What it is
A past due invoice is one that has not been paid by its due date. The terms overdue, late and delinquent are used interchangeably. Once past due, the invoice moves out of the current bucket of the aging report and begins accumulating age.
Example
An invoice for $7,500 dated August 15 on net 30 terms was due September 14. On September 15 it is one day past due. On October 14 it is 30 days past due and moves from the 1 to 30 bucket to the 31 to 60 bucket on the aging report. The customer’s account shows it as overdue, and it has triggered three reminders in the dunning sequence.
Why it matters
An invoice becoming past due is the trigger point for most of the AR process: dunning sequences escalate, the aging report shifts, and credit holds and late fees may apply. The percentage of total receivables that is past due at any time is one of the simplest health indicators for an AR function. Most B2B companies have 20% to 30% of receivables past due at any moment; under 15% indicates a well-run process.
Payment Allocation
What it is
Payment allocation is the process of assigning a received payment to the appropriate customer account and invoices.
Example
A customer sends a $30,000 payment covering a $10,000 invoice and a $20,000 invoice. The payment is allocated across both documents.
Why it matters
Correct allocation keeps customer balances and AR reports accurate. Incorrect allocations can create false overdue balances and unnecessary customer follow-ups.
Payment Gateway
What it is
A payment gateway is technology that securely transmits payment information between the customer, the business, and the organizations involved in authorizing the transaction.
Example
A customer enters card details through an online payment page. The gateway securely sends the information for authorization and returns the payment result.
Why it matters
A reliable gateway allows customers to pay online and gives businesses immediate confirmation of payment attempts. The customer experience and integration quality can influence payment adoption.
Payment Link
What it is
A payment link is a clickable URL that takes a customer to an online page where they can pay an invoice or account balance.
Example
A reminder email includes a link that opens a payment page prefilled with the invoice number and amount due.
Why it matters
Payment links shorten the path from reminder to payment. They also reduce errors by connecting the payment with the relevant customer and invoice information.
Payment Method
What it is
A payment method is the mechanism a customer uses to transfer money to a supplier. Common B2B methods include bank transfers, cards, checks, ACH, and direct debit.
Example
A customer uses ACH for recurring invoices and a card for one-time purchases.
Why it matters
Payment methods differ in speed, cost, convenience, and failure risk. Offering suitable options can reduce payment friction and help customers pay on time.
Payment Plan
What it is
A payment plan is an agreement that allows a customer to pay an outstanding balance through a series of scheduled installments.
How to calculate it
For equal installments without interest:
Installment amount = Total balance ÷ Number of installments
Example
A customer cannot immediately pay a $12,000 overdue balance. The supplier agrees to four monthly payments of $3,000.
Why it matters
A payment plan can improve the likelihood of collection when a customer is experiencing temporary financial difficulty. Clear deadlines and consequences for missed installments help make the arrangement enforceable.
Payment Processing
What it is
Payment processing covers the steps required to authorize, transfer, and confirm a payment between a customer and a business.
Example
A customer submits a card payment through a portal. The transaction is authorized, settled into the supplier’s account, and written back to the accounting system.
Why it matters
Efficient processing gives customers a dependable way to pay while providing finance teams with timely transaction data. Strong integration can also reduce manual reconciliation work.
Payment Reconciliation
What it is
Payment reconciliation is the process of comparing payment records with bank transactions, invoices, and accounting entries to confirm that they agree.
Example
The accounting system shows a customer payment of $15,000. The finance team verifies that the same amount reached the bank and was applied to the correct invoices.
Why it matters
Reconciliation identifies missing transactions and incorrect allocations. It also ensures that AR balances reflect the company’s actual cash position.
Payment Reminder
What it is
Payment reconciliation is the process of comparing payment records with bank transactions, invoices, and accounting entries to confirm that they agree.
Example
The accounting system shows a customer payment of $15,000. The finance team verifies that the same amount reached the bank and was applied to the correct invoices.
Why it matters
Reconciliation identifies missing transactions and incorrect allocations. It also ensures that AR balances reflect the company’s actual cash position.
Promise to Pay
What it is
A promise to pay is a commitment from a customer, made during a collections conversation, to pay a specific amount by a specific date. It is recorded against the invoice so the collections team knows to pause reminders until that date and to follow up if the payment does not arrive.
Example
A collector calls a customer about a $14,000 invoice that is 20 days overdue. The customer’s AP manager explains that their payment run is on the 25th and commits to including the invoice. The collector records a promise to pay of $14,000 on the 25th. Reminders for that invoice are suspended. On the 26th, the payment has not arrived, and the invoice is flagged for a follow-up call.
Why it matters
A promise to pay converts an open-ended overdue invoice into a dated commitment, which is useful for cash forecasting and for holding the customer to their word. Tracking whether promises are kept is also a measure of customer reliability: a customer who keeps 95% of promises can be trusted on the next one, while a customer with a history of broken promises needs a different approach. Without a record, promises made on a phone call are forgotten by both sides.
Reconciliation
What it is
In accounts receivable, reconciliation is the process of confirming that the AR ledger, the bank account, and the customer’s own records all agree. It includes matching payments in the bank to payments recorded in the ledger, confirming that the sum of open invoices equals the AR balance on the general ledger, and resolving any differences.
Example
At month end, the AR sub-ledger shows $1,340,000 in open invoices and the general ledger AR account shows $1,352,000. The $12,000 difference is traced to a payment recorded in the bank on the 31st that was not applied to any invoice before the ledger closed. Once the payment is applied, both figures agree at $1,340,000 and the month can close.
Why it matters
Reconciliation is what makes the AR numbers trustworthy. An aging report built on an unreconciled ledger will show invoices as open that have been paid and balances that do not match what the customer sees, which leads to misdirected reminders and disputes. It is also a control: differences between the ledger and the bank are where errors, duplicate payments and, occasionally, fraud show up.
Remittance Advice
What it is
Remittance advice is a document a customer sends to tell the supplier which invoices a payment covers. It lists the invoice numbers, the amounts paid against each, and any deductions or adjustments. It may arrive as an email, a PDF, a line in the bank transfer reference, or a file from the customer’s AP system.
Example
A customer pays $47,300 by bank transfer. The same day, its AP system emails a remittance advice to the supplier listing five invoices: four paid in full totalling $45,800, and one paid at $1,500 against an invoiced $1,800, with a note reading “short shipped 3 units.” The supplier’s AR team uses the document to apply the payment and open a query on the $300 difference.
Why it matters
Without remittance advice, cash application is guesswork. A bank transfer for $47,300 with a reference of “payment” could correspond to many combinations of open invoices, and the AR team either spends time working it out or leaves the cash unapplied. Remittance advice that arrives with the payment, in a structured format, is what allows automated cash application to work. Its absence is one of the biggest causes of unapplied cash.
Short Payment
What it is
A short payment, or short pay, is a payment for less than the full invoice amount. The customer may have deducted for damaged or missing goods, applied a discount the supplier did not agree to, offset a credit they believe they are owed, or simply made an error. The remaining balance stays open on the invoice.
Example
A supplier invoices $12,000. The customer pays $11,400 and its remittance advice notes a 5% deduction for late delivery under a service level clause in the contract. The supplier applies the $11,400, leaving $600 open, and refers the deduction to the account manager to confirm whether the clause applied. It did, and a credit memo closes the balance.
Why it matters
Short payments create small open balances that are disproportionately expensive to resolve. Each one requires someone to identify the reason, decide whether it is valid, and either issue a credit or pursue the difference. Left unattended, they accumulate in the aging report and distort DSO. Tracked by cause, they are a useful signal: a pattern of deductions for late delivery or pricing errors points to a problem in operations or contracting, not in collections.
Trade Credit
What it is
Trade credit is the arrangement in which a supplier delivers goods or services and allows the customer to pay later. It is the default way B2B commerce works: the payment terms on an invoice are trade credit. The supplier is effectively lending the customer the invoice amount, interest free, for the length of the terms.
Example
A component supplier ships $200,000 of parts to a manufacturer on net 45 terms. For 45 days the manufacturer has the parts and the supplier has a receivable. The supplier has, in effect, made a 45-day interest-free loan of $200,000. Across all its customers, the supplier has $3M of such loans outstanding at any time, funded from its own working capital.
Why it matters
Trade credit is the largest source of short-term financing for most businesses, larger than bank lending, and most companies are both borrowers and lenders of it. The receivables side is a decision about how much of the company’s own capital to lend to customers and to which ones. Credit limits, terms and collections are the tools for managing that lending. Viewing receivables as loans rather than as paperwork tends to change how seriously a company manages them.
Trade Credit Insurance
What it is
Trade credit insurance protects a supplier against the risk of a customer failing to pay because of insolvency or prolonged default. The insurer assesses the supplier’s customers, sets a covered limit for each, and pays out a percentage of the loss, typically 80% to 90%, if a covered customer does not pay.
Example
A supplier insures its receivables portfolio. Its largest customer, with a covered limit of $150,000, enters administration owing $140,000. The supplier files a claim with supporting invoices and evidence of its collection attempts. After the waiting period specified in the policy, the insurer pays 90% of the loss, $126,000. The supplier writes off the remaining $14,000.
Why it matters
For companies with concentrated customer bases, a single default can be existential, and insurance converts that risk into a predictable premium. It also has a secondary effect: insurers monitor customers continuously and reduce or withdraw cover when a customer’s financial position weakens, which gives the supplier early warning it might not otherwise have. Cover comes at a cost, usually 0.1% to 0.5% of insured sales, and requires the supplier to follow the insurer’s rules on limits and collection timelines.
Unapplied Cash
What it is
Unapplied cash is money that has been received from a customer but has not yet been matched to a specific invoice. It sits in a holding account, reduces the customer’s overall balance in principle, but leaves the individual invoices it was meant to pay showing as open.
Example
A customer sends $25,000 with a bank reference that reads only the company name. The customer has eight open invoices totalling $41,000, none of which sum to $25,000 in any obvious combination. No remittance advice arrives. The payment is recorded as unapplied cash on the customer’s account while the AR team emails the customer’s AP contact to ask which invoices it covers.
Why it matters
Unapplied cash is a problem on both sides. The supplier has the money but its records still show the invoices as unpaid, so DSO is overstated, the aging report is wrong, and the customer may be chased for invoices it has already paid. The customer, meanwhile, sees a balance that does not match its own records. A rising unapplied cash balance is a sign that cash application is falling behind, usually because remittance information is not arriving in a usable form.
Unsecured Credit
What it is
Unsecured credit is credit extended without requiring the customer to provide collateral. The supplier relies primarily on the customer’s ability and willingness to pay.
Example
A supplier allows a customer to purchase $50,000 of services on Net 30 terms without requiring a deposit or secured asset.
Why it matters
Unsecured credit increases exposure if the customer experiences financial difficulty. Credit checks and appropriate limits help businesses control that risk.
Weighted Average Days to Pay
What it is
Weighted average days to pay measures how long customers take to pay invoices while giving greater importance to higher-value payments.
How to calculate it
Weighted average days to pay = Sum of each payment amount × Days to pay ÷ Total amount paid
Example
A customer pays a $10,000 invoice after 20 days and a $90,000 invoice after 50 days. A simple average would show 35 days, while the weighted average is 47 days.
Why it matters
A simple average can be distorted by numerous small invoices. Weighting by payment amount produces a more representative view of how quickly the company’s cash is being collected.
Wire Transfer
What it is
A wire transfer is an electronic bank-to-bank payment commonly used for high-value or international transactions.
Example
A customer instructs its bank to send a $250,000 payment directly to the supplier’s bank account.
Why it matters
Wire transfers can move large amounts quickly and provide clear confirmation of payment. Transaction fees and incomplete payment references can create additional reconciliation work.
With-Recourse Factoring
What it is
With-recourse factoring is an arrangement in which a business sells invoices to a factor while retaining the risk of customer nonpayment.
Example
A factor advances 90% of a $100,000 invoice. If the customer fails to pay, the business must repay the factor or replace the invoice with another eligible receivable.
Why it matters
With-recourse factoring generally costs less because the supplier retains the credit risk. The business receives faster access to cash while remaining financially responsible for uncollectible invoices.
Without-Recourse Factoring
What it is
Without-recourse factoring, also called non-recourse factoring, transfers specified customer nonpayment risks to the factor.
Example
A business sells a $100,000 invoice under a non-recourse arrangement. If the customer becomes insolvent for a reason covered by the agreement, the factor absorbs the loss.
Why it matters
Non-recourse factoring can protect a business against certain credit losses. It usually carries higher fees, and the agreement may only cover narrowly defined events such as customer insolvency.
Working Capital
What it is
Working capital is the difference between a company’s current assets and current liabilities. Accounts receivable is usually a significant component of current assets.
How to calculate it
Working capital = Current assets − Current liabilities
Example
A company has $1.5 million in current assets and $1 million in current liabilities. Its working capital is $500,000.
Why it matters
Working capital indicates the company’s ability to meet short-term obligations and fund daily operations. Faster collections can convert receivables into usable cash without changing the total working-capital calculation.
Working Capital Ratio
What it is
The working capital ratio, commonly called the current ratio, compares a company’s current assets with its current liabilities.
How to calculate it
Working capital ratio = Current assets ÷ Current liabilities
Example
A company has $1.5 million in current assets and $1 million in current liabilities. Its working capital ratio is 1.5.
Why it matters
The ratio provides a high-level indication of short-term liquidity. The quality of the current assets also matters because overdue or uncollectible receivables may be difficult to convert into cash.
Working Capital Turnover Ratio
What it is
The working capital turnover ratio measures how much revenue a company generates relative to its average working capital.
How to calculate it
Working capital turnover ratio = Net sales ÷ Average working capital
Example
A company generates $5 million in annual net sales and has average working capital of $500,000. Its working capital turnover ratio is 10.
Why it matters
The ratio helps finance teams assess how efficiently the business uses short-term resources. A very high ratio can also indicate that the company has limited liquidity relative to its sales volume.
Write-down
What it is
A write-down reduces the recorded value of a receivable when the company expects to collect only part of the outstanding balance.
How to calculate it
Write-down amount = Recorded receivable − Expected recoverable amount
Example
A customer owes $20,000 but agrees to a final settlement of $12,000. Subject to the company’s accounting policy, the remaining $8,000 may be written down.
Why it matters
A write-down gives a more realistic view of the amount the company expects to recover. It differs from a complete write-off because part of the receivable remains collectible.
Write-off
What it is
A write-off removes an uncollectible receivable from the company’s accounts according to its accounting policy.
How to calculate it
A useful performance measure is:
Write-off rate = Receivables written off ÷ Net credit sales × 100
If a company writes off $25,000 against $2 million in net credit sales:
$25,000 ÷ $2,000,000 × 100 = 1.25%
Example
After exhausting its collection options, a company determines that a $7,500 customer balance cannot be recovered and writes it off.
Why it matters
Writing off an account prevents the balance sheet from overstating receivables. Tracking write-offs by customer and reason can also reveal problems in credit decisions or collection processes.
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