Glossary

Credit risk analysis involves assessing a customer's ability to fulfill financial commitments, particularly concerning unpaid invoices. This process is vital for identifying potential defaulters and implementing strategies to minimize the fallout from this. In the context of A/R, credit risk analysis helps businesses determine the creditworthiness of clients before extending starting a business relationship and/or credit terms. This proactive approach ensures that credit is granted to reliable customers, thereby reducing the incidence of write-offs, bad debts and enhancing overall financial stability.​

Accounts receivable management is the process of overseeing and holding customers accountable for the receivables (also called money or payments) that customers owe to a business for goods or services provided on credit. It encompasses various activities, including setting credit policies, managing credit applications, invoicing, reminding customers about upcoming or past due invoices, monitoring outstanding balances, cash application and of course actually collecting payments. Effective accounts receivable management ensures that a company maintains a healthy cash flow, minimizes bad debts, sustains positive customer relationships and does all of this efficiently.

​Financial reconciliation is a fundamental accounting process that ensures the accuracy and consistency of a company's financial records by comparing internal records with external sources, such as bank statements or vendor invoices. This process is vital for maintaining financial integrity, detecting discrepancies, and ensuring compliance with regulatory standards.​

A credit policy, is a set of guidelines that businesses use to determine how they extend credit to customers, manage outstanding receivables, and handle payment terms. In the realm of B2B credit management, a credit policy serves as a structured approach for assessing creditworthiness, defining payment terms, and ensuring timely collections.

Credit card reconciliation is a critical financial process where transactions on credit card statements are compared and matched with corresponding entries in an organization’s accounting records. The purpose is to identify discrepancies, ensure the accuracy of financial data, and prevent potential fraud or errors. For businesses, this process is particularly important when managing corporate credit cards, where multiple employees may make purchases that need to be tracked and accounted for.

In any business relationship, disputes arise over payments, invoices, or debts. Addressing these issues promptly and effectively is essential to maintaining accurate records and maintaining customer relationships. The first step in this process for finance and A/R teams is a collection dispute letter.

Cash posting is the process of recording incoming cash payments from customers and matching them against outstanding invoices in a company's accounting system. When executed manually, the process can be complex as it typically involves reconciling payments received via various methods, such as electronic payments, checks, credit and debit cards, or ACH transfers. Each payment method necessitates a distinct posting procedure to ensure precision.

Also known as “closing the books,” a balance sheet reconciliation is the process of ensuring a company’s financial statements are accurate and free of errors. Balance sheet reconciliation is a holistic process that includes balancing the accounts of three main categories: assets, liabilities, and equity.

In accounting, a bad debt reserve is an expense taken against a receivable. It is an estimate or percentage of the number of receivables that will not be collected.
The bad debt reserve in your balance sheet impacts your cash flow and forecasting.

Cash flow modeling is the process of matching a business’ expected income with expected expenses throughout the lifetime of the business. It is an ongoing process of taking current cash flow data from an organization and considering different scenarios (including worst-case scenarios) to forecast the company’s future financial position.

An accounts receivable journal entry is the recording of an accounts receivable transaction in the company’s records, typically a general ledger. These transactions are made on credit and when the invoice is paid it is then recorded in a collection of accounts receivable journal entry.

Bad debt expense is the value of uncollectible payments. It occurs when a customer either cannot pay due to financial difficulties or refuses to pay due to a dispute over the product or service. It is important for companies to understand how to find bad debt expense and keep track of it so that they have an accurate picture of its financial standing.

Also known as OTC or O2C, order to cash is the process from the order until a payment is recognized. It is the moment in which the customer action goes beyond the marketing and sales stage and enters the entire order processing system.

Accounts receivable days, or accounts receivable days outstanding (ARDO), is the number of days on average it takes for a company to collect on its invoices.

A B2B payment gateway secures payment as it is processed in the payment portal while also authorizing online payments and notifying organizations that the payment has been processed. The payment gateway process offers an easy, convenient and secure way for customers to pay their receivables while connecting with a range of different business software to optimize the A/R process.

B2B payment automation is the use of technology to streamline the payment process a business uses to pay its suppliers or vendors. Traditionally, teams have manually executed this process, but many businesses are now convinced of the value of replacing those manual processes with automated ones.

Your credit utilization ratio is a key component of your credit score, and focuses on revolving credit, or credit that is continually extended, paid and extended again. Your business should strive to maintain its best credit utilization ratio – one that is as low as possible – to maintain a high credit score so that it can take advantage of business loans it needs for future growth and investment.

A customer payment portal, also known as a self-service payment portal, gives customers various self-service online payment options for products and services with companies that they do business with. The payment portal is a secure website set up by the supplier. It is beneficial as it eliminates the traditionally manual tasks related to the payment process, which are complex and require multiple steps of verification due to the potential for human error.

Traditionally, the accounts receivable process was manual, and involved a complex series of steps that often had to be repeated and verified for accuracy. This manual process was prone to error, resulting in inaccuracies that increase your DSO, directly affect the company’s cash flow and anger customers. As a result, companies have started moving towards accounts receivable automation.

Customers today have more options than ever to make payments, including ACH, eChecks, wire transfers, credit cards, debit cards and digital payments. Global companies have the added complexity of multiple bank accounts in different countries and currencies. As a result, the payment reconciliation process can be overwhelming for many companies, particularly those entering a significant period of growth. Account reconciliation automation can provide a solution to this challenge.

Over half (65%) of businesses today still rely on manual processes for their invoicing and payment. Adopting a digital invoicing and payment process is a reliable method for these companies to reduce costs and increase efficiency in their accounts receivable teams.

Whether it’s a tactical method used by customers when they are short on cash, or an honest billing error, there will be times when your customer disputes the invoice amount. This discrepancy in payment can wreak havoc in your business, building tension and mistrust in customer relationships, leading to late payment and ultimately, a negative cash flow.

Deductions management is the process involved when a customer claims a deduction, or when the invoice amount paid is less than expected. This can be due to receiving damaged goods, less inventory than ordered, or simply errors in billing. While receiving damaged goods or errors in billing fall into the category of claims deductions, receiving a discount after ordering beyond a predetermined monthly threshold falls into the category of earned deductions. Deduction management verifies that the customer’s claims are valid and evaluates the amount of the dedication they claim as well.

Collections analytics are the different KPIs and metrics used to analyze collections data in an A/R invoice-to-cash management platform. They can include classic A/R KPIs and metrics such as DSO and ADD in addition to aging buckets, accounts receivable turnover and the collection effectiveness index for both A/R teams and individual collectors.

Businesses facing challenges with their cash flow have different options available to them, each with their own pros and cons. While pledging accounts receivables is one of the solutions your business might use to gain access to immediate cash, a lot depends on the terms and conditions of the agreement. Unlike the factoring of receivables, however, which sells the receivables at a discount to a third party, one of the main advantages of pledging accounts receivables is that it allows your business to maintain control over them.

Since B2B payments are made on credit, it’s critical that your company’s A/R department has an effective cash application process to renew the customer’s credit and enable the buyer to continue to purchase your company’s goods or services. The quicker and more streamlined the cash application process is in your business, the more time and resources you’ll save. A more efficient A/R cash application process also helps your business run more smoothly, accelerating your cash flow and facilitating growth.

Maintaining a healthy cash flow is critical for any business, as is ensuring the timely payment of invoices. To facilitate both, businesses must have a clear process for understanding which customers to extend credit to and at what limit. This is essential, as customers usually buy goods and services from a company based on the amount of credit they have approved.

Outstanding cheques, missing receipts, and accounting errors are all reasons why your business’s bank statements, or external accounting, might be different from the company’s cash book, or internal bookkeeping. The identification and resolution of these differences is the responsibility of a company controller or accounting manager of an organization, using a process called bank reconciliation.

Invoice factoring is a specific type of invoice financing that gives control of the invoice collections to a third party. This is in contrast to invoice discounting, where a company sells invoices to a third party but remains responsible for collecting payment from customers. Invoice factoring is sometimes also referred to as accounts receivable factoring or debt factoring.

Invoice financing is an umbrella term for different methods that helps B2B businesses improve cash flow and working capital by leveraging unpaid invoices. It provides an immediate cash injection — usually within 1-2 days — for businesses to cover operational expenses, invest in growth opportunities or manage short-term financial challenges. Invoice financing is also known as accounts receivable financing or receivables financing.

Account reconciliation is the process accountants use to confirm the accuracy of the general ledger or other financial documents. In some cases, accountants complete this at the end of an accounting period, such as during year-end tax filings.

Credit collection likely ranks among your least favorite activities as a business owner. Getting paid is excellent, but the process of collecting that money can feel overwhelming.

Accounts receivable factoring provides a short-term boost to cash flow. Small business owners accomplish this by selling their invoices at discounted rates to a factoring company, which is often different from a traditional lender. The business receives a large percentage of the invoice value, and the factoring company maintains contact with the customer to secure the rest. Upon successful payment, it keeps a portion for itself and pays the remaining amount to the business owner. It should be noted that accounts receivable factoring should only be considered for bad debt that a business feels they are unlikely to collect on. 

Is accounts receivable an asset or liability? Accountants treat it as an asset because it represents money owed to a business by its customer, client, or another party. It is one of the most critical assets for any business as it helps to generate new revenue and provides working capital for operational expenses. Because of this, companies can often leverage accounts receivables to secure credit and investment capital.

Accounts receivable (A/R) dispute resolution is the process of addressing and resolving disputes or discrepancies that arise between your company and its customers regarding outstanding invoices or payments.

Accounts receivable outsourcing is a business practice where a company hires a third-party vendor or partner to handle some or all of their accounts receivable functions. This outsourcing company may take care of tasks such as invoicing customers, tracking payments, following up on unpaid bills, and performing customer credit checks, and more.

By outsourcing these tasks, companies can free up valuable time and resources to be applied to other core business operations or to focus on complex A/R issues that are best handled internally.

The direct write-off method is an accounting procedure for recording uncollectible accounts receivable. This method treats bad debt as a specific expense. The alternative involves estimating the amount of uncollected debt and accounting for it through an allowance for doubtful accounts.

The net accounts receivable refers to the total amount of money owed to a company by its customers. This figure represents how much money the A/R team expects to collect from customers within a certain period. Knowing the net receivables formula is only the beginning of harnessing the power of this metric. Managers must also leverage its power to improve collections efforts.

An Accounts Receivable Dashboard is a visual tool used to manage, analyze, and monitor accounts receivable operations. It provides an overview of all A/R activities in one place that team members can easily understand.
It can also integrate with other relevant tools, such as ERP or billing systems. This provides further insights into customer behavior and payment trends. It also helps the A/R team make informed decisions quickly when dealing with customer disputes and late payments.

Businesses fail to scale when they're unable to properly manage their finances.

The ratios you calculate from your company's financial accounts are useful indicators of the health of your organization. Stakeholders can use these ratios to learn important details about the business's operations and other factors. But if you’re unable to provide this information, how will you know where your business stands financially?

Stakeholders, especially investors and shareholders, place a great value on financial ratios. Internally, managers use these ratios as a yardstick to measure the success of their own departments. Investors can use financial ratios to gain insight into many different areas of a company such as measures of liquidity, profitability, efficiency, and market value.

Tracking your accounts receivable to sales ratio (A/R Sales) keeps you informed and protects you from liquidity problems. Here's how.

Accounts Receivable (A/R) deductions involve situations wherein companies don’t receive full payment for goods or services rendered. If an invoice isn’t paid in full, the amount not paid is considered a deduction. This is common when consumers receive damaged goods or otherwise aren’t able to reap the full, promised value of a service. They can also be the result of billing errors, shipment shortages, or client bankruptcy.

Whatever the reason, companies need an accounts receivable deduction management process in place to handle these issues when they arise.

Accounts Receivable (A/R) reporting is a process by which organizations maintain oversight and control of accounting operations. Regular reporting brings visibility to important accounting metrics and key performance indicators (KPIs), representing an ongoing way to continually improve finance functions.

An A/R report can take different forms, but before we discuss the value of reporting tools, let’s take a quick look at a few of the top accounts receivable reporting metrics that these reports outline.

Top Accounts Receivable Reporting Metrics

As those familiar with accounts receivable (A/R) know, Dunning processes help companies capture unpaid revenue and maintain customer relationships. It’s no secret that consistent, predictable cash flow is the lifeblood of many businesses, but revenue predictability can’t be achieved unless customers pay on time.

Dunning processes are outreach programs applied to delinquent accounts. When a customer fails to pay, a message is deployed (usually through A/R software automation) contacting the customer, informing them of the issue and asking for remediation.

It sounds simple, but a well-designed dunning message—and process overall—can do wonders for revenue capture.

Clearing accounts provide a temporary buffer to hold transaction details and funds. They remain in this area while financial professionals confirm each one and move them to their respective accounts. Consequently, clearing accounts serve as a centralized location to verify and reconcile transactions. Holding accounts, wash accounts, buffer accounts, and zero-balance accounts are some of the many other names financial professionals use.

When it comes to accounting, one of the most important, and often tedious tasks is ensuring that all payments received by a company are recorded correctly in the books. This process is known as cash application, and the A/R team can do it manually or through automation. So, what are the pros and cons of both methods? And, what are some best practices to improve the process?

Merchant underwriting is one of the most critical elements of offering payment processing services to the right companies. It involves thoroughly evaluating a merchant's account to determine the level of risk a payment facilitator would undertake by working with it. Facilitators extend credit to cover charges before receiving the funds when processing payments. Consequently, they need to ensure they can trust the merchants they work with to fulfill their financial obligations.

Cash on delivery is a payment method that allows customers to pay for goods or services when they receive them rather than upfront or 30 days later. This payment method has several benefits and challenges compared to other options. Is it the best method for your business? If yes, what are some best practices for implementing it?

Cash flow is one of the top concerns of businesses worldwide. Boosting income might seem like the solution to all problems, but accountants also need to know where to apply each payment. Remittance advice simplifies this by explaining why the payer sent the money. For example, it could go to a specific invoice, or the customer could want to apply it to a principal owed and not late fees.

Payment friction is widely acknowledged by sales professionals as the main factor influencing conversion rates. Payment redirection is one method that introduces friction by taking customers to another website to pay.

Cash flow is a top concern for businesses of all sizes. However, it can present a particular problem for small businesses. The invoice-to-cash flow process tackles this problem by establishing a detailed plan for collecting payments.

Financial professionals often rely on credit score modeling to determine how much credit to extend. Some companies use static credit scores, while other companies use dynamic scores.

Debt management is one of the most critical tasks businesses need to handle. Proper management reduces bad debt and boosts cash flow. Some companies prefer to manage this task in-house.

Credit risk is the potential loss that may occur if a borrower defaults on their loan. The failure to pay could result in the creditor not receiving the total principal or interest owed.

The collection effectiveness index provides a more accurate alternative to the days sales outstanding calculations. Like its rival, it measures the effectiveness of the accounts receivable team.

Advance billing is one of the two methods companies use for invoicing customers. While arrears billing waits until customers accrue debt, an advance invoice involves sending a bill before completing the work or delivering products.

An aged trial balance report is a financial statement that lists all of a company's outstanding receivables from its customers. It sorts the information by how long each receivable has remained in past-due status.

Collection scoring is a process you can use to manage and understand your business's debt. This type of score model takes specific factors into account, such as collection accounts, average collection period, and amount owed.

A debt collection agency is a company that specializes in collecting overdue or unpaid debts. Businesses often hire DCAs to collect outstanding payments from customers or clients.

A company's ability to access credit at reasonable rates depends heavily on its financial status and credit rating. Several companies provide business credit reporting services to help creditors determine creditworthiness and set eligibility limits.

When a client doesn't pay the total amount of an invoice, it can seriously hurt your business finance. What is a short paid invoice, and what can you do about it?

Remittance advice is a less-talked-about piece of documentation that nevertheless plays a crucial role in the AR department.

Accounts receivable is one of the most crucial functions of a business. It ensures that the company physically collects the revenue it makes on paper and does so in a timely manner.

Implementation and follow-up practices determine how well ACH payments benefit your company. Failure to put proper systems in place can lead to human errors, security weaknesses, and some of the same problems that plague cash payments.

A sales invoice is a document that businesses issue to customers to request payment for goods or services sold.

Financial process automation is the use of technology to streamline financial processes.

An open invoice is simply an invoice sent to a customer that they have not yet paid

Proof of debt is needed when a customer owes you money and you may need to prove debt through the resolution process.

Collection risk refers to the possibility that you will not receive payment for goods or services you already provided or delivered.

Accounting score predicts the likelihood that a given customer will pay their bill on time

This process matches invoices to the corresponding payments received. Doing this ensures that all payments are accounted for and recorded correctly.

The fixed asset turnover ratio or FAT ratio measures how efficiently a company uses its fixed assets to generate revenue.

A long term liability is a debt or obligation that a company owes and will need to pay off over more than one year.

Uncollectible A/R are amounts of money that a business believes customers will not repay.

Invoice matching is the process of verifying that the invoice received from a supplier is accurate and corresponds to the purchase order placed by the buyer.

Businesses send invoice collection letters to remind customers of their past-due invoices and the need for prompt payment.

The first collection letter is the start of a series of collection letters that business owners send to their clients.

Receivables are the debts owed to your company. If you’ve agreed to do business by producing goods or services and collecting payments at a later date, you have outstanding receivables until the debt has been paid. 

An account balance is the total amount of money in a bank account or general ledger account. Accountants or banks usually calculate this by taking the sum of all deposits and subtracting all withdrawals.

A write-off is an expense that a business can subtract from its taxable income or taxes. This reduces the amount of money it owes to tax agencies.

Accounts Receivable Risk Management is the process of identifying, assessing, and managing the risks associated with accounts receivable and extending credit to customers.

An overdue invoice occurs when a customer fails to pay his or her bill within the agreed-upon time frame.

A balance sheet is a financial statement that shows the assets, liabilities, and owner's equity of a business for a specific period.

An unapplied payment primarily refers to a payment that doesn’t have a matching invoice. In other instances, it might have a matching invoice but it hasn’t been settled.

A business’s credit score can range from 0 to 100. The higher the number, the greater the likelihood of a business paying its bills in full and on time. Vendors and lenders review this information to determine eligibility for loans and trade credit.

“Trade receivables” refers to the total amounts owed to your company for the products or services sold to customers, but for which you have not yet received payments.

If your business provides credit to customers, then you likely encountered a notes receivable before. This promissory note details payment for a loan within a certain time period at a specific interest rate.

POS is “point of sale.” The term does not specify the payment method but refers to electronic payments. In the past, this only included debit cards or credit cards.

An accounts receivable flow chart is the process by which your financial department sends invoices and collects money on a cycle.

Cash application is the process of matching incoming payments with client accounts, and more importantly, the correct invoice. 

Accounts Receivable (AR) measures the exact amount of money your clients owe for goods or services you’ve provided on credit.

These tools basically automate your accounts receivable collections process by giving your team new features and functions that streamline common AR processes:

B2B credit management is used by B2B accounts receivable teams to distinguish between collecting payments from businesses vs. collecting payments from consumers.

An early payment discount is an incentive creditors can provide for paying invoices ahead of schedule.

The cash flow cycle performance metric helps companies identify how long it takes to convert their inventories into cash. It measures this time in days.

Past due email notices are sent to clients to inform them of an unpaid invoice that has gone beyond the due date.

Payment facilitator services simplify options for processing payments. Most PayFac companies focus on electronic payments, but some have even facilitated options for accepting checks and cash during online purchases.

Invoice Management refers to the management of your own business invoices. This internal business function requires the finance team to process and pay incoming invoices while also aligning payments with available cash.

A duplicate payment occurs when an entity makes an extra payment in the same amount as the original. This is usually caused by an accounting error or processing glitch.

A collection policy is an official strategy your business uses to meet and exceed its accounts receivable goals. This written document includes clear and detailed guidelines identifying who to extend credit to, how much, and why.

B2B collection refers to the process of collecting unpaid invoices or other forms of corporate debt. This debt can be sold to special agencies or business owners could hire professionals to handle the task.

Accounts correspondence also refers to the documentation of accounting transactions and resulting communications with clients and customers.

The corporate cash forecasting process involves reviewing financial documents and completing complex calculations to predict how much cash the business will have at a specific date.

Collections performance metrics refers to the group of calculations accountants use to monitor collection trends. By extension, these metrics also help managers determine how well accounts receivable teams carry out their jobs.

Business owners and accountants can use several metrics to determine how quickly customers are paying their bills. Collector efficiency refers to the success rate of collecting debts owed.

Average days delinquent (ADD) refers to the average number of days that pass between due dates for invoices and the receipt of payment. Accounts receivable teams use this metric to evaluate client accounts and analyze payment delinquency across several accounts.

Managers use receivable turnover to measure the effectiveness of their accounts receivable team and how well they collect on invoices owed. That, in turn, helps managers determine how well they manage their assets, which includes company inventory.

Days sales outstanding shows the average number of days it takes a business to convert a sale into cash. Managers usually calculate DSO on a timed schedule, such as annually, quarterly or monthly.

The accounts receivable aging report categorizes a company's accounts receivable according to the length of time an invoice has been outstanding. The table lists all current customers, their balances, and how they are categorized. Companies can then use this information to determine how to proceed with collecting debts and whether it’s worth pursuing.

A cash flow statement is a financial document illustrating how money moves into, through and out of a business. It shows how much cash the company has on hand to pay its financial obligations and how much it keeps in reserves.

Also known as a dunning letter, this refers to a message sent to encourage customers to pay. These messages generally start out neutral and friendly and then become sterner as time goes by. In the past, these messages took the form of actual letters, but modern businesses use many different forms:

An average receivables collection period refers to the typical time it takes for companies to receive invoice payments. More specifically, it describes the time that elapses between the sales date and the date the customer paid for the goods or services rendered.

The order-to-cash process refers to converting orders into cash payments for the business while fulfilling orders for customers. It is commonly abbreviated as “O2C” or “OTC” and covers the sales and fulfilment process from start to finish. While both B2C and B2B companies have an OTC process, it manifests differently.

Also known as accounts receivable representatives, these professionals dedicate their efforts to ensuring customers pay their invoices in full and on time. Collections professionals are responsible for making phone calls, sending emails and taking other steps to ensure customers make payments.

This type of loan allows business owners to pass the risk of payment on to another company. That creditor fronts the majority of the money owed so the business owner has cash in-hand to meet immediate obligations. The amount paid upfront depends on the industry and the risk associated with that industry.

Document management provides the perfect solution for properly storing and organizing all your accounts receivable documents. Companies today need software to streamline their accounts receivable process. This turns most documents into electronic copies that become far easier to sort.