Assessing the Health of your Accounts Receivable with NetSuite

Aug 29, 2022 by Sage Thee

Amidst economic uncertainty, record layoffs, and a looming recession, assessing the health of your AR is more crucial than ever. The current economic outlook is hardly optimistic, which is no surprise to business owners and financial professionals across the country. The disruption of the COVID-19 pandemic still casts a long shadow over how companies plan and provision, and many have yet to "return to normal" or have given up hope they ever will.

With mounting whispers of a recession, it's understandable that you might panic. Who isn't feeling the anxiety and pessimism? But you have to keep in mind that external factors are not the only or even primary determinants of business success — some businesses stumble and fall during recessions, but others thrive and grow in that same recessionary environment.

Paystand is here to help you not only survive but thrive in this economic downturn and to recession-proof your bottom line. Companies that survive and thrive during a recession typically share two common characteristics: cash reserves and access to capital. Therefore, planning well in advance for the next downturn is critical. We will walk you through the best practices, tips, and key metrics to assess the health of your AR — and offer insights on how your business can blossom during this time.

Three key metrics to assess your financial health

1. Net days in AR

Arguably one of the most crucial metrics to determine your company's financial health, net days in AR is the average number of days it takes to collect the payments due for services or goods rendered and serves as a trending indicator of overall AR performance. We recommend monitoring this metric monthly — that way, you'll know immediately if any problems arise.

To calculate days in AR:

  1. Total charges for the last 6 months / number of days in the previous 6 months = average daily charges
  2. Total AR / average daily charges = days in AR

2. DSO

Closely related to your net days in AR, your days' sales outstanding (DSO) — the average number of days it takes credit sales to be converted into cash or how long it takes your company to collect its account receivables — is another key metric you'll want to monitor closely.

To calculate DSO:

Accounts Receivables / Net Credit Sales X Number of Days = DSO

 

3. Aging AR

The longer an invoice remains unpaid, the likelihood of collecting the total amount significantly decreases. The aged AR metric indicates the collectability of those receivables, serving as a performance indicator of revenue cycle effectiveness at liquidating AR.

Aged AR should be measured as a percentage in what is referred to as "buckets" relative to your total AR. Depending on your payer mix, the >90 days bucket should make up no more than 25% of your total AR.

 

Growing amidst economic uncertainty

While evaluating the health of your AR is a crucial part of preparing for an economic downturn, it's not the only task you'll want on your to-do list to effectively recession-proof your bottom line. You'll want to plan ahead with a comprehensive cash flow forecast and aggressively collect receivables.

Plan ahead

A cash flow forecast is crucial for any business because it tells you if you'll have the needed revenue to run or expand the business. It also allows you to see if more cash is going out of the company than in and identify the problem areas so you can reverse that cash drain. We've compiled a handy cash flow forecasting guide to make this process a breeze.

Aggressively collect receivables

NetSuite Credit Card Processing can help you collect any outstanding invoices, enabling you to quickly and easily generate and send invoices, define credit terms, manage collections, obtain the required liquidity to fund growth, shorten DSO, and seize new investments and opportunities as they arise. Offering real-time visibility throughout the entire AR process, finance teams can find the status of receivables anytime, from a wide-ranging scope of receivables down to each individual client and invoice.

 

Recession-proof your revenue with integrated AR and payment automation

The right strategy for such stagflationary times is to recession-proof your business by realizing top-line revenue faster and reducing costs of AR operations.

Finance teams running on NetSuite can realize top-line revenue faster by

  • Invoicing and collecting more quickly by up to 60%
  • Making it easier for customers to make payments

Finance teams running on NetSuite can reduce the cost of AR operations by up to 50% by

  • Reducing credit card fees of 3-5%
  • Using a fee-less banking network
  • Fixing a monthly cost to process an unlimited number of payments

With Paystand and NetSuite on your side, you can stand firm in a turbulent economic environment and scale your business without your fees and manual tasks scaling too.

Get your free copy of our ebook, 7 Ways to Recession-proof your Business with Modern B2B Payments and NetSuite, to discover more ways your business can thrive through the recession with style.