Having an accounts receivable department without analyzing your accounts receivable data does little to ensure your business is properly managing finances. Important decisions regarding new purchases, expansion, office moves, etc., cannot be accurately measured without understanding how much money your company will be collecting within a single month, quarter, or year.
Accounts Receivable (AR) measures the exact amount of money your clients owe for goods or services you’ve provided on credit. Although the money hasn’t been collected, your accounting team still consider AR an asset since it’s money your business will collect shortly.
Importance of Accounts Receivable Data Analytics
Unfortunately, not all clients are reliable, and it’s assumed 100% of the money owed to your company will not be collected. It’s essential to analyze your AR books to uncover trends such as unreliable clients that continuously default on their payments and other unforeseen problems.
A few key takeaways into understanding the critical nature of your accounts receivable analytics are:
- Help your financial team and investor(s) understand your company’s financial stability
- Know at a glance which clients have not paid in full
- Know what percentage of invoices are paid on time month over month
- Uncover trends in your cash flow
How to Analyze Accounts Receivable
There are many methods to analyze accounts receivable, but one of the simplest approaches that works for a wide range of businesses is measuring your AR to sales ratio. This metric will always give you an idea of how many clients have not paid their invoices at any given time.
The formula is AR divided by your sales. This will give you the most accurate understanding of your financial status. For the best financial stability and to ensure you’re collecting most of the money owed, you’d want the number to be lower. This is the simplest way to calculate money owed manually and what to expect at the end of each month.
Again, your AR can be analyzed using several different processes, from simple to complex. But one thing all the methods have in common is giving you an ability to quickly gauge how your business is doing financially.
Analytics should be able to tell you the following:
- Any outstanding balances
- Payments due at the end of the month
- Percentage of outstanding debt written off
- Percentages of accounts paid month after month
- Percentages of overdue payments
- Trends: unreliable clients
By knowing where your business stands, you’ll be able to calculate what your company can afford and make better decisions to increase your bottom line and help your business grow.
Streamline Your AR Process Through Animation
Your accounts receivable metrics can become overwhelming depending on how many clients you have, how much money is owed, when invoices are due, etc. Streamline your AR process by turning to proven automation software.
Gaviti can help you improve your accounts receivable process, analyze your data quickly, and always know the state of your company’s finances. To find out how you can improve your business’s accounts receivable process, contact Gaviti.