AR aging and collections: how to get paid without losing the customer

01Reading the aging#

An AR aging lists every open invoice by customer and sorts the balances into buckets by how far past due they are: current (not yet due), 1–30 days, 31–60, 61–90 and over 90. It is the one report that shows who owes you what and how stale it is, and its total must equal the accounts receivable line on the balance sheet. If the two disagree, either the aging or the ledger is wrong, and you find out which before you trust either.

A worked example. At September 30 the aging shows $84,000 current, $31,500 at 1–30 days, $12,000 at 31–60, $6,000 at 61–90 and $4,500 over 90: $138,000 in total, which ties to accounts receivable. Read it from the right. The $4,500 over 90 days is a question about whether it will ever be paid. The $6,000 is a phone call this week. The $31,500 is mostly customers who will pay this month if reminded.

Two things to look for besides the totals. A customer with a negative balance has paid more than they owe or paid before an invoice existed; that is a credit, not good news, and it may belong in liabilities at month end. And a large share of one bucket sitting with one customer is a concentration risk the totals hide.

02DSO: one number for the trend#

Days sales outstanding is accounts receivable divided by revenue for a period, times the days in that period. It estimates how long, on average, a dollar of sales takes to turn into cash. Using the example: $138,000 of receivables against $252,000 of revenue invoiced in the quarter, times 90 days, is a DSO of about 49 days.

Compare it with your terms, not with another company. On Net 30 terms, 49 days says customers are paying around three weeks late on average. Track it monthly using the same method each time; a jump in DSO is usually the first visible sign that collections slipped, weeks before the bank balance shows it. For a SaaS business that bills annually up front, DSO swings with the billing calendar, so read the trend across the same month in prior years.

03A dunning cadence that runs itself#

Dunning is the sequence of reminders a customer gets about an unpaid invoice, and QuickBooks Online, Xero and most billing tools can send them on a schedule. Most late B2B invoices are not refusals. They are an invoice stuck in an approval queue, missing a PO number, sent to someone who left. The first person-written reminder should ask what is in the way, not repeat the amount. And a disputed invoice drops out of the sequence immediately until the dispute is resolved.

The point is consistency: every customer gets the same cadence, and nobody has to remember to send the awkward email. One reasonable sequence, which you should adjust to your terms and customers:

• A few days before the due date: a friendly note with the invoice and the payment link attached.
• On the due date: a reminder that it is due today, with the same link.
• About 7 days past due: a direct email from a person, asking whether anything is blocking payment.
• About 14 days past due: a second reminder, copying the person who signed the contract.
• About 30 days past due: a phone call, and a request for a date the payment will be made.
• About 45 to 60 days past due: escalation, decided by a person, not a template.

04Promises to pay, and what to do when they break#

“We’ll pay it Friday” is the single most useful fact in collections, and it usually lives in someone’s inbox. Record it against the customer: the date, the amount and who said it. Pause the reminders until the date. If the money doesn’t arrive, the promise is broken, and the next step is a call, not another automated email.

When a customer can’t pay the whole balance, a payment plan turns one overdue invoice into dated installments without changing the total owed. Put it in writing. The aging should then reflect the plan’s due dates, so the account shows as current while the customer keeps to it and late again the day they don’t.

05When to escalate#

Escalation is a business decision, and the founder or whoever owns the relationship should make it. The usual steps, roughly in order: a call from someone senior on your side; pausing service, if your contract allows it, with written notice; a formal demand letter; then a collection agency, small claims court or a lawyer, depending on the amount and on what your contract and your state allow.

Each step costs more and damages the relationship more, and the odds of collecting fall the longer an invoice ages. That is the argument for doing the cheap steps early. It is also the point at which the accounting question starts: once an invoice is past 90 days with no plan, ask whether it belongs in the allowance for credit losses, or should be written off.

06Unapplied cash#

Cash application is matching each payment to the invoices it pays. It breaks in predictable ways: a customer pays three invoices with one transfer and no remittance advice, pays the wrong amount, or pays an invoice you haven’t issued yet. Until it is matched, the payment sits as unapplied cash.

A worked example. A customer with two open invoices of $4,000 and $6,500 wires $12,000 with no note. Applying it: debit cash $12,000; credit accounts receivable $10,500 against the two invoices, and the remaining $1,500 is a credit on the customer’s account. If they have no other open invoice at month end, that $1,500 is a liability, a customer credit balance, until you refund it or apply it to their next invoice. It is not revenue, and leaving it as a negative inside receivables understates both what customers owe you and what you owe them.

Clear unapplied cash every week. Ask the customer what the payment was for, apply it, and refund genuine overpayments. A small pile of unapplied cash makes the aging wrong for every customer in it, and the dunning sequence will chase people who have already paid.