Outstanding Accounts Receivable: Definition, Common Mistakes and How to Avoid Them

Outstanding accounts receivable is just a fancy term for money your business is waiting to collect after delivering goods or services. And it's a bigger deal than most companies realize — U.S. businesses are sitting on about $3 trillion in unpaid invoices, which is roughly 24% of their monthly revenue just floating in limbo.

This isn't just a minor inconvenience. Late payments can hurt business owners. For instance, let’s take this statistics from the UK:  late payments cost smaller businesses in the UK around £22,000 every year and contribute to about 50,000 business closures annually. Then there's another survey gathering insights from business owners across 11 countries: about 10% of small and medium business invoices turn into bad debt, and teams spend around 15 days per year just chasing payments.

So why should you care about getting your AR processes right?

For one, your cash flow depends on it. When customers pay on time, you have money to run daily operations, pay your people, and invest in growth.

And second, your overall financial health improves dramatically when you're not writing off unpaid invoices or spending weeks chasing down payments.

This article will show you the most common AR mistakes businesses make and — more importantly — how to fix them with smart processes and the right tools. By the end, you'll have a clear path to transform your receivables from a constant worry into a well-oiled machine that supports your business growth.

What is Outstanding Accounts Receivable?

Outstanding accounts receivable (AR) is money that customers owe you for goods or services you've already delivered but haven't been paid for yet. It's a crucial part of your cash flow and has a direct impact on how much money your company has to work with day-to-day.

Key components of outstanding accounts receivable

Accounts Receivable Process: After you make a sale, you create an invoice that basically says "hey, here's what you bought, here's what you owe, and here's when we'd like to be paid." It's pretty straightforward, but getting it right makes a big difference.

Role of Invoices: Invoices do more than just ask for payment. They're also your proof if things go south and you need to show that a customer really does owe you money. When you send invoices quickly and make sure all the details are correct, you'll generally get paid faster too.

Clear Payment Terms: Being upfront about when and how you expect to be paid helps avoid awkward conversations later. Your payment terms should tell customers exactly when payment is due, what payment methods you accept, and what happens if they pay late. When everyone knows what to expect, there's a lot less confusion and your customer relationships stay stronger.

Knowing these parts of AR management can lead to better cash flow and stronger partnerships with your customers. It's also important to know that accounts receivable is an asset, not a liability — this affects how you think about your company's financial position. And implementing some tips for improving AR collection periods can make your operations run more smoothly and get cash in the door faster.

Common Mistakes in Managing Outstanding Accounts Receivable and How to Avoid Them

When you don't manage your accounts receivable well, your cash flow takes a hit. Here are some common mistakes businesses make and what you can do differently:

1. Extending Credit Without Assessing Creditworthiness
   Giving credit to customers without checking if they can actually pay is a bit like lending money to a stranger — sometimes it works out fine, but often it doesn't. Creating a good credit policy helps you make smarter decisions about who gets credit and who needs to pay upfront.
2. Delaying Contact on Unpaid Invoices
   Putting off those follow-up calls or emails when an invoice is late can really hurt your Days Sales Outstanding (DSO). Interestingly, about 34% of late payers say there's "no specific reason" for their delay — they just needed a reminder. Setting up a regular schedule for contacting customers about overdue payments keeps money coming in more consistently.
3. Neglecting Manual Processes
   If you're still tracking everything in spreadsheets or — even worse — on paper, you're probably wasting time and making mistakes. Automated AR solutions can save your team hours of work while improving accuracy. These solutions work well for companies of all sizes, and the time savings alone usually justifies the cost.
4. Ignoring AR Reports Until Year-End
   Waiting until tax time to look at your AR reports means you miss chances to fix problems throughout the year. It's like only checking your bank account once a year — you don't know where you stand day-to-day. Regular reviews of who owes you money and for how long helps you spot trends and address issues before they become real problems.
5. Treating AR as a Simple Accounting Function
   AR involves both bookkeeping and managing customer relationships and cash flow strategy. When you think of it as just another accounting task, you miss opportunities to strengthen customer loyalty and improve your financial position. Great AR management balances getting paid on time with maintaining good relationships.

Fixing these common issues can help your business improve cash flow and build better customer relationships. And that's really what good AR management is all about.

Challenges Faced in Accounts Receivable Management

Late Payments Impacting Cash Flow

Late payments can really mess with your cash flow. Just think about a small manufacturing company that saw their available cash drop by 20% because some big customers weren't paying on time. That's a tough situation — you've got bills to pay but the money you're owed is sitting in someone else's bank account.

What makes this even harder is that many small and medium businesses don't want to chase these payments. Over 30% of SMBs avoid following up on late payments because they're worried about damaging their customer relationships. That's a lot of companies letting money slip through their fingers just to keep clients happy.

Miscommunication About Payment Expectations

A lot of payment problems start with mixed messages about when and how customers should pay. A software company once found this out the hard way — they weren't clear enough about their payment terms, and suddenly they had trouble making payroll because so many clients were paying late.

Solutions: Talking Clearly With Customers

You can fix many of these problems by just communicating better with your customers:

• Written agreements: Make sure your payment terms are spelled out in black and white.
• Regular reminders: Set up a system that automatically reminds clients when payments are coming due.
• Open dialogue: Let customers know they can talk to you if they have questions about their invoices.

When you're upfront about payment expectations, you'll have fewer outstanding invoices and better relationships with your customers. Both you and your clients benefit when there's no confusion about when money is due.

Best Practices for Managing Outstanding Accounts Receivable Effectively

Sending Invoices Right Away

Don't wait to bill your customers. As soon as you deliver a product or finish a service, get that invoice out the door. The faster you send it, the faster you'll get paid, and that keeps your cash flowing smoothly.

Keeping an Eye on Who's Paid and Who Hasn't

Check your outstanding invoices regularly. When you monitor who owes you money and for how long, you can reduce your Days Sales Outstanding (DSO) and spot potential problems early. This way, you can follow up at the right time and improve your chances of getting paid on schedule.

Handling Disputes Quickly and Well

Keep those lines of communication open when customers have questions about their bills. When you address their concerns quickly, you build trust and keep relationships strong, while also making sure payments don't get delayed even more. Being clear about what you expect during these conversations helps prevent misunderstandings that could cause further delays.

By following these simple practices, you can make your accounts receivable process work better, get more cash in the door, and keep your customer relationships positive. Good AR management is about being systematic in how you approach getting paid, which helps your business stay stable and grow.

Leveraging Technology, Including AI Solutions, in Managing Outstanding Accounts Receivable

Technology has changed the game for accounts receivable management. AR automation software makes it much easier to handle tasks that used to take forever and were prone to mistakes. Here are some of the main benefits:

• Better Visibility: AI tools like Fazeshift show you what's happening with your invoices in real-time, so your finance team can track payments more easily.
• Fewer Manual Errors: When you automate reconciliation, you cut down on mistakes that happen when people do this work by hand.
• Faster Invoicing: Automated systems turn sales contracts into invoices right away, which means money flows into your business faster.
• Customer Reminders: These systems make scheduling payment reminders super simple, and that means more customers pay on time.

Companies that go all-in on automation see really great results. Businesses that automate more than half of their AR workflows cut their DSO by about 32% — that's roughly 19 fewer days waiting for payment. That's money in your pocket much sooner.

By using these advanced tech solutions, your company won't just be more efficient — you'll also be able to adapt quickly when market conditions change, all while keeping your customer relationships strong.

Strategies for Reducing Days Sales Outstanding (DSO) While Maintaining Healthy Customer Relationships

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Getting paid faster while keeping your customers happy might seem tricky, but with the right approach, you can do both. Here are some strategies that work well:

Offer Early Payment Discounts

Giving customers a little discount for paying early can motivate them to settle up sooner. This cuts your DSO and makes customers feel like they're getting a deal. A 2023 survey showed that 59% of businesses would consider offering B2B customers a discount for paying sooner — so it's definitely a popular approach.

Flexible Installment Plans

Some customers might struggle to pay large invoices all at once. By letting them pay in chunks, you make it easier for them to meet their obligations without putting too much strain on their cash flow. This can be especially helpful for keeping good relationships with smaller clients who might have more limited resources.

Consistent Communication

Staying in touch about payment expectations is crucial. Regular updates and friendly reminders help make sure customers know when they need to pay and what options they have. This is probably the most important part of the whole process — when people know what's expected, they're more likely to follow through.

Each of these approaches helps create an environment where customers feel valued while you still get paid on time. When you work with customers as partners rather than just seeing them as sources of revenue, you build trust that leads to long-term relationships and better financial health for your business overall.

Final Thoughts: Taking Control of Your Accounts Receivable

Outstanding accounts receivable doesn't have to be a constant headache for your finance team. With the right strategies and tools, you can turn this challenging area into a well-managed part of your business.

The key takeaways from this article are pretty straightforward:

• Clear communication with customers about payment expectations is essential
• Sending invoices promptly and following up consistently makes a big difference
• Leveraging automation dramatically reduces the time and effort spent chasing payments
• Offering flexible payment options can help maintain good customer relationships

For mid-market and enterprise companies with AR teams of 5-25 people, these challenges are all too familiar. You're dealing with complex billing scenarios, juggling hundreds or thousands of invoices, and trying to keep your DSO as low as possible — all while making sure your customer relationships stay positive.

This is where AI-powered solutions like Fazeshift come in handy. By automating your AR workflows, you can free up your team to focus on more strategic work while reducing errors and getting paid faster. Fazeshift plugs right into your existing systems like Salesforce or NetSuite, so you don't need to replace everything you're already using.

Want to see how it works for your specific business needs? Fazeshift offers personalized demos that show exactly how their system would handle your unique billing and collection processes. You can see firsthand how the AI handles tasks that used to take hours of manual work.

Schedule Your Demo

Ready to make accounts receivable management easier for your team? Take 30 minutes to see how Fazeshift's AI solution can streamline your AR processes. Their experts will walk you through a customized demo based on your industry and specific challenges.

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