Why Old Methods of Accounts Receivable Analysis Don’t Work? And What Can You Do About It?  

Have you seen those TikTok videos suggesting you can charge a phone with a potato? To say the least, it’s ridiculous, and it doesn’t work.   

The same can be said about accounts receivable analysis. Old methods don’t work properly and can cost time and money.   

So, in this guide, we’ll talk about why you need to ditch old methods and what you can do instead.   

What is Accounts Receivable Analysis and Why Does it Matter?   

Before you know what accounts receivable analysis is, it’s important to mention what accounts receivable are.   

In simple terms, accounts receivable is the money your clients owe you for the goods or services you’ve delivered. It’s like a snapshot of what will come into your business.  

To keep your cash flow healthy and your operations running smoothly, it’s crucial to regularly analyze your accounts receivable data. Why? Because this helps you pinpoint inefficiencies or roadblocks that might otherwise fly under the radar. By digging into these insights, you can optimize your cash flow and make smarter decisions for your business.  

The good news? You don’t need a massive budget or resources to complete it. With the right tools—like accounts receivable automation software (don’t worry, we’ll talk about that in a short while)—the process becomes much simpler and far less time-consuming.  

Why Old Methods of Accounts Receivable Analysis Doesn’t Work?  

Over time, experts have devised several ways to assess the quality of a company’s accounts receivable. These methods rely on key performance indicators to track the efficiency of AR processes and provide actionable insights into cash flow management. Let’s explore some of the most critical metrics:  

1. Average Collection Period  

This metric helps measure the average number of days it takes your business to collect payments. It’s a vital tool for businesses where maintaining a healthy cash flow is crucial. To calculate, you can apply the following formula:  

AR Balance ÷ Total Net Sales × 365  

2. Accounts Receivable Turnover  

This metric shows how often, on average, your business collects its receivables within a year. A higher turnover indicates better efficiency in collecting payments.  

The formula for accounts receivable turnover is:  

Net Credit Sales ÷ Average Accounts Receivable  

3. Days Sales Outstanding (DSO)  

DSO reveals the average time it takes to collect payments after a credit sale. This is a key metric for assessing how effectively your business manages credit terms. Its formula is 

(Total AR ÷ Total Credit Sales) × Number of Days  

4. Collection Effectiveness Index (CEI)  

CEI measures how effectively your business collects receivables. It’s often used alongside DSO for a detailed view of collection efficiency. The formula for CEI is:  

Beginning AR + Credit Sales/N – Ending A 

_____________________________________ x100 

Beginning AR + Credit Sales/N – Ending A 

5. Bad Debt Ratio  

The bad debt ratio, or write-off rate, measures the percentage of accounts receivable that goes uncollected. A lower ratio is generally better, indicating tighter credit controls. Here’s how you can calculate bad debt:  

(Uncollected Sales ÷ Yearly Sales) × 100  

Besides these simple methods, there are other ways to do AR analysis.  

6. Aging Report  

You can use an aging report to see how long invoices have been outstanding since the original billing date. These reports typically group invoices into time ranges, or “buckets,” such as 0–30 days, 31–60 days, 61–90 days, and over 90 days.  

Most modern accounts receivable automation tools make generating aging reports a breeze. These reports are vital whether you create one manually or let your software do the heavy lifting. Many businesses use them to send out dunning notices—reminders to clients—when invoices hit specific overdue milestones, helping keep payments on track.  

7. Trend Analyses  

A trend analysis goes further by letting you monitor bad debt as a percentage of sales over time. It’s especially useful for spotting seasonal revenue patterns and planning accordingly. By tracking your accounts receivable balance at the end of each month over the past year, you can identify trends and address potential issues before they escalate.  

Just like aging reports, most accounts receivable automation software includes built-in tools for generating trend analysis reports. These insights help you stay ahead of the game and ensure your cash flow remains steady.  

What’s the Problem Here?   

Now, you’ll say, “Oh Invo, these are easy formulas, and I can copy them and calculate my AR. The thing is, you need something to calculate AR. Here are the methods you can try:   

You can start managing your accounts receivable (AR) by opening a fresh Excel file and inputting your data. Add columns for invoice amounts, due dates, and client details like names and contact information. Including contact details is a small step now but a huge help later when you need to follow up on overdue invoices.  

You’re technically good to go once everything is updated in your Excel sheet. It’s simple—on paper, at least. In reality, this approach often falls short.  

Why Spreadsheets Fall Short for AR Tracking and Analysis? 

While Excel might seem like a quick fix, it comes with some serious drawbacks, especially as your business grows:  

1. Lack of Centralization  

Spreadsheets can quickly become a mess. Keeping the sheet accurate and up-to-date becomes nearly impossible if multiple team members are involved or invoices aren’t meticulously logged. And if you can’t trust your data, the spreadsheet loses its purpose entirely.  

2. Time-Consuming  

Even if you’re diligent, you’ll likely spend much time toggling between software or chasing team members for the latest updates. Manually tracking client communications regarding overdue payments adds another layer of complexity and eats into your day.  

3. Prone to Errors  

From outdated data to manual formula inputs, spreadsheets are a breeding ground for human errors. And when mistakes happen, your AR metrics can’t be trusted, making it hard to make informed decisions.  

The bottom line? Spreadsheets might work when starting, but they aren’t built for scaling. Manual AR tracking will become a bottleneck as your client base grows and your business picks up speed.  

What’s the Better Option?  

If you already use accounting software, leveraging it for accounts receivable management is a logical next step. Most accounting tools include AR features, such as tracking pending invoices or offering dashboards with key metrics like DSO or billing cohorts.  

The Benefits of Using Accounting Software for AR  

• Centralized Data: Your invoices, billing, and client contacts are all in one place, synced with your existing finance stack.  
• Real-Time Updates: Your software integrates with tools like your CRM or billing systems, keeping data up-to-date without extra effort.  
• Actionable Insights: Dashboards provide clear metrics and trends so you can make quick decisions without diving into spreadsheets.  

If your current software doesn’t offer these features, it might be time for an upgrade.  

Why Consider Tools Like InvoBill?  

A solution like InvoBill can take your AR management to the next level. It streamlines the entire process, offering a centralized dashboard with everything you need at a glance.  

• Stay Organized: See your latest data, client details, and overdue invoices in one place.  
• Take Action Quickly: Send reminders and follow-ups directly from the app, eliminating the need to switch between tools.  
• Save Time and Reduce Stress: No more scrambling for updates or delaying payment reminders because you’re unsure where to start.  

Final Thoughts   

Getting rid of old and traditional AR methods is helpful for maintaining a healthy cash flow and ensuring the long-term success of your business. 

While spreadsheets may seem quick and cost-effective, their limitations—like decentralization, time consumption, and error-prone processes—make them less practical as your business scales.  

With InvoBill, managing your accounts receivable becomes effortless, letting you focus on growing your business instead of chasing payments.  

FAQs  

Why are accounts receivable as an asset and not a revenue?  

Accounts receivable are an asset because they represent money owed to your business for completed sales. While it stems from revenue, it hasn’t yet been received as cash, making it a collectable resource rather than earned income. This classification helps track what’s due to the business.  

How do you record a write-off of accounts receivable?  

To write off accounts receivable, debit the bad debt expense account to recognize the loss and credit accounts receivable to remove the unpaid amount from your books.  

What is the accounts receivable turnover ratio?  

The accounts receivable turnover ratio measures how efficiently a business collects customer payments. It’s calculated by dividing net credit sales by the average accounts receivable. A higher ratio indicates that the company collects payments quickly, crucial for maintaining healthy cash flow.