Accounts Receivable and Collections: Getting Paid on Time

Managing Accounts Receivable and Collections in SaaS

Ensuring timely payment collection to maintain healthy cash flow. **DSO analysis and benchmarking** Calculating DSO: Formula: (Accounts Receivable ÷ Monthly Revenue) × 30 Example: | Month | Revenue | AR balance | DSO | |---|---|---|---| | January | £200K | £350K | 52.5 days | | February | £210K | £380K | 54.3 days | | March | £220K | £320K | 43.6 days | Trend: Improving (DSO decreasing) DSO benchmarks by billing model: | Billing model | DSO target | Typical range | |---|---|---| | Self-serve (auto-billing) | <5 days | 0-10 days | | SMB (credit card) | <15 days | 5-30 days | | Mid-market (invoice) | <45 days | 30-60 days | | Enterprise (invoice) | <60 days | 45-90 days | Blended DSO target: Depends on customer mix - Self-serve heavy: <15 days - Enterprise heavy: <50 days - Mixed: <30 days Working capital impact: Every 10 days of DSO on £5M ARR: - AR = (£5M / 365) × 10 = £137K - This is cash you've earned but don't have - Reducing DSO by 10 days releases £137K in working capital Example improvement: - Current DSO: 55 days on £5M ARR - Target DSO: 35 days - Improvement: 20 days - Cash released: £274K (significant for growing company) **Invoicing best practices** Invoice accuracy and timing: Send immediately: - Invoice on day of service start (not end of month) - Reduces payment delay by 15-30 days - Example: Customer starts January 5, invoice January 5 (not February 1) Include on every invoice: - Clear payment terms (net-30, net-60) - Payment methods accepted - Bank details or payment link - Purchase order number (if required) - Contact for billing queries - Due date (prominently displayed) Format: - PDF attachment to email - Include payment link (click to pay) - Integrate with accounting system Payment methods: Conversion rate by payment method: | Method | Setup friction | On-time payment | Cost | |---|---|---|---| | Credit card (auto) | Low | 95% | 2.5-3.5% | | Direct debit (auto) | Medium | 98% | £0.20-0.50 | | Bank transfer (manual) | Low | 70% | Free | | Cheque (manual) | High | 60% | £5 processing | Recommendation: - Self-serve/SMB: Credit card or direct debit (auto-billing) - Mid-market: Direct debit preferred, bank transfer accepted - Enterprise: Bank transfer (most will only do this) **Automated collection workflow** Phase 1: Pre-due date (automated) Day -7: Payment reminder - Email: "Your invoice of £X is due in 7 days" - Include: Payment link, amount, due date Day -3: Payment reminder (enterprise only) - Email to finance contact - Confirm PO and payment details correct Phase 2: Due date (automated) Day 0: Auto-collect attempt - Credit card: Auto-charge - Direct debit: Auto-collect - Invoice: Mark as due Day +1: Payment confirmation or retry - If collected: Thank you email - If failed: Retry payment + notify customer Phase 3: Follow-up (semi-automated) Day +7: First follow-up - Automated email: "Your payment is overdue" - Include: Outstanding amount, payment link - Tone: Friendly, helpful Day +14: Second follow-up - Automated email + personal note from account manager - For enterprise: Phone call from CSM - Tone: Concerned, offering help Day +21: Third follow-up - Email from finance team - For enterprise: Escalate to senior contact - Mention: Service continuity Phase 4: Escalation (manual) Day +30: Formal overdue notice - Formal letter from CFO - Payment plan option offered - Service impact warning Day +45: Account manager escalation - Direct conversation about payment - Negotiate payment plan if needed - Document all communications Day +60: Service suspension warning - Written notice: 14 days to pay or service suspended - Copy legal if large amount Day +75: Service suspended - Read-only access (data preserved) - Final payment demand Day +90: Final action - Write off or send to collections - Collections agency typically takes 25-40% of amount - Legal action if >£10K (consider cost vs recovery) **AR ageing analysis** Monthly AR ageing report: | Ageing bucket | Amount | % of AR | # invoices | |---|---|---|---| | Current (not yet due) | £150K | 37.5% | 45 | | 1-30 days overdue | £120K | 30.0% | 30 | | 31-60 days overdue | £80K | 20.0% | 15 | | 61-90 days overdue | £30K | 7.5% | 8 | | 90+ days overdue | £20K | 5.0% | 5 | | Total AR | £400K | 100% | 103 | Analysis: - 67.5% is current or <30 days (healthy) - 12.5% is >60 days (concerning) - Focus: 8 invoices aged 61-90 days (£30K at risk) Collection probability by age: | Age | Collection probability | |---|---| | Current | 99% | | 1-30 days | 95% | | 31-60 days | 85% | | 61-90 days | 70% | | 90-120 days | 50% | | 120+ days | 25% | Expected collection: = (£150K × 99%) + (£120K × 95%) + (£80K × 85%) + (£30K × 70%) + (£20K × 50%) = £148.5K + £114K + £68K + £21K + £10K = £361.5K Expected bad debt: £400K - £361.5K = £38.5K **Bad debt management** Bad debt provision: Create provision based on AR ageing: | Ageing | AR balance | Provision % | Provision amount | |---|---|---|---| | Current | £150K | 1% | £1.5K | | 1-30 days | £120K | 3% | £3.6K | | 31-60 days | £80K | 10% | £8K | | 61-90 days | £30K | 25% | £7.5K | | 90+ days | £20K | 50% | £10K | | Total | £400K | - | £30.6K | Bad debt provision: £30.6K (7.65% of AR) P&L impact: - Bad debt expense: £30.6K (charged to operating expenses) - Adjust monthly as AR ages Write-off process: Criteria for write-off: - >90 days overdue - No response to 3+ collection attempts - No payment plan agreed - Customer confirmed insolvent/closed Approval: - <£5K: Finance manager - £5-25K: CFO - >£25K: CEO + board notification Documentation: - Record of all collection attempts - Customer communication - Reason for write-off - Accounting entry (debit bad debt expense, credit AR) **Improving collection rates** Strategy 1: Auto-billing (biggest impact) - Implement for all self-serve and SMB - Target: 80%+ of customers on auto-billing - Impact: DSO drops to <5 days for these customers Strategy 2: Payment terms in contract - Specify: Net-30 (standard), Net-15 (preferred) - Enterprise: Net-45 maximum (push back on net-60) - Include: Late payment interest clause (1.5-2% per month) Strategy 3: Early payment discount - Offer 2% discount for payment within 10 days (2/10 net 30) - Example: £10K invoice, pay within 10 days = £9.8K (save £200) - Your cost: 2% discount = £200 - Your benefit: Cash 20 days earlier - Annualised cost: 2% × (365/20) = 36.5% APR (expensive, use selectively) Strategy 4: Deposit for large deals - Enterprise deals >£50K: Request 25-50% deposit on signing - Example: £100K annual deal, 50% deposit = £50K upfront - Reduces AR and improves cash flow Strategy 5: Credit assessment - For enterprise (>£50K ACV): Run credit check before signing - Use: Experian, Dun & Bradstreet, CreditSafe - Cost: £10-50 per check - Reject or require prepayment for high-risk customers