Definition
Accounts Receivable Collections is the process of pursuing and securing payment from customers for goods or services that have already been delivered. It begins when an invoice is issued and ends when the payment is received or written off as bad debt.
Accounts Receivable (AR) represents the amount customers owe. Collections is the work of converting those receivables into cash. Together, they form the foundation of cash flow management and directly influence a company’s liquidity and financial health.
Why Collections is a Strategic Function
Strong collections is the difference between recorded revenue and cash in the bank. For SaaS and recurring-revenue companies, where customers pay monthly, quarterly, or annually—slow or inconsistent collections strain working capital, increase bad-debt exposure, and cloud true financial performance.
Effective collections programs:
- Optimize cash flow: Accelerate cash inflows to fund operations, payroll, and growth.
- Reduce bad debt: Early intervention prevents invoices from aging into uncollectible territory.
- Lower Days Sales Outstanding (DSO): Improve the speed at which sales convert to cash.
- Strengthen financial integrity: Ensure that revenue recognized under ASC 606 is ultimately collectible.
- Free finance capacity: Reduce manual chasing and follow-ups so teams can focus on forecasting, analysis, and strategic work.
The Modern Collections Process
A modern collections process is proactive, automated, and designed to resolve issues before invoices age. It typically follows a clear, escalating sequence:
Step 1: Invoice Issuance – Send accurate, timely invoices with clear payment terms and flexible payment options. The process starts clean so collections don’t have to get messy.
Step 2: Proactive Monitoring – Use real-time AR aging dashboards to track upcoming due dates and identify at-risk accounts before they become delinquent.
Step 3: Automated Reminders – Send polite, scheduled reminders before the due date and immediately after it passes. Consistent, predictable nudges that reduce manual chasing.
Step 4: Dunning Management – Initiate a structured, escalating communication sequence for overdue invoices, including late-fee notices and account-manager involvement.
Step 5: Final Escalation & Resolution – For severely delinquent accounts, implement credit holds, service suspension, or third-party collections—and determine whether the balance should be written off.
Controllers and senior accountants track these KPIs to measure and benchmark collections performance:
| KPI | Definition | Why It Matters |
|---|---|---|
| Days Sales Outstanding (DSO) | The average number of days it takes to collect payment after invoicing. Formula: (Average AR / Total Credit Sales) × Number of Days | Lower DSO means faster cash conversion and stronger liquidity. |
| Aging Accounts Receivable | A breakdown of unpaid invoices grouped by age buckets (e.g., 0–30, 31–60, 61–90, 90+ days). | Reveals delinquency patterns and helps prioritize collection efforts. |
| Collection Effectiveness Index (CEI) | Measures the percentage of receivables collected within a period. | A CEI near 100% indicates a highly efficient collections operation. |
| AR Turnover Ratio | How many times receivables convert to cash during a period. Formula: Net Credit Sales / Average AR. | Higher turnover reflects strong collections discipline and healthy cash flow. |
SaaS Context & Challenges
SaaS companies face unique AR collections challenges driven by recurring billing, variable charges, and high invoice volume. The four most critical are:
- High-Volume, Low-Value Invoices
Recurring monthly billing creates thousands of small invoices. Manual dunning and follow-up cannot scale, leading to delayed collections and rising DSO. - Involuntary Churn from Payment Failures
A large share of overdue receivables comes from expired cards, bank declines, or failed autopay, not customer intent. Recovering this revenue requires automated retries and proactive payment updates, not traditional collections tactics. - Usage-Based and Variable Billing Complexity
When invoices change every month based on consumption, customers need clear explanations and timely billing. Any confusion slows payment and creates avoidable disputes that clog the collections queue. - Subledger-to-GL Misalignment
AR lives in the billing subledger, but financial reporting depends on the GL. If mappings drift or syncs fail, AR balances become inaccurate—creating reconciliation pain and eroding trust in the numbers.
How Ordway Solves It
- Automated Invoice Generation: Creates recurring, one-time, and usage-based invoices directly from contract terms.
- Automated Dunning: Sends automated reminder sequences tailored to aging, customer type, and payment history.
- Involuntary Churn Recovery: Automatically retries failed payments and prompts customers to update payment methods, reducing avoidable churn.
- AI Cash Application: Matches payments to open invoices instantly so AR aging and DSO stay accurate.
- AR Subledger: Tracks every invoice, reminder, and payment event with timestamped logs for clean audit evidence.
- GL Sync: Posts AR and cash activity to NetSuite, QuickBooks, or Sage Intacct using controlled mapping rules.
Example: Recovering a Failed Payment
A customer is on a $2,400 monthly subscription. Their credit card expires at renewal.
Day 1: Payment fails → Ordway immediately sends an “Update Payment Method” email with a one-click portal link.
Day 3: Ordway automatically retries the card.
Day 5: Reminder email + optional in-app notification.
Day 7: Customer updates the card → Ordway processes the payment instantly → service remains uninterrupted.
Outcome: Finance never touches the workflow. Most failed payments are recovered automatically, preventing involuntary churn and keeping DSO low.
Takeaway
Accounts receivable collections turn earned revenue into realized cash. For SaaS companies, automating collections through a connected subledger like Ordway isn’t a luxury—it’s how you maintain healthy cash flow, lower DSO, and keep financials audit-ready.
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