What is collections?

Definition

Collections is the work of following up on unpaid customer invoices until they are paid, settled, or given up. It is a process around accounts receivable, not a separate account you post to.

You call, email, and send reminders so cash comes in. The receivable stays on the Balance Sheet until a payment, a credit, or a later write-off clears it.

Where it shows up

Balance Sheet: Related to the open receivables being chased.

Cash flow: Related to cash that arrives when those follow-ups work.

P&L: Related to nothing extra unless a later write-off hits expense.

See also: Accounts Receivable Aging · Dunning · Days Sales Outstanding

When you look at the Balance Sheet, this work sits behind the accounts receivable line in current assets. A growing overdue share of that line means follow-up is falling behind.

Cash on the Statement of Cash Flows rises when a follow-up produces a payment. Collections does not create revenue; the revenue was recorded when the sale was earned.

Days sales outstanding is the average number of days it takes to collect an invoice. Collections is the activity that tries to bring that average down.

An aging report tells you which open invoices to chase. Collections is the chasing itself.

How it works

A sale is billed and the receivable opens. If payment has not arrived by the due date, follow-up begins.

The first step is often a short reminder that the balance is due. Then comes a call, a list of open items, and a firmer notice if the invoice keeps aging.

You usually work the oldest and largest balances first. You also check whether the customer is disputing the work, waiting on a credit, or simply late.

Nothing journals when you pick up the phone. The books change only when cash is applied, a credit is issued, or a balance is written off later.

When cash arrives, someone matches it to the open invoices. That matching is a different step from collections, which is the follow-up that made the cash show up.

If the customer will not pay, the balance may later be removed from the books. That removal is not collections; collections is the attempt before you give up.

Some shops also pause new orders while a large overdue balance sits open. The hold is a collections tool, not a new account on the Balance Sheet.

Example

A florist billed a cafe $400 for bread on March 1. On April 15 the invoice is 45 days old and still open, so the florist calls the cafe manager.

The cafe says the check is in this week's run. The florist notes the promise, posts nothing for the call, and watches for the $400.

If the check arrives, cash goes up and accounts receivable goes down. If it does not, the florist calls again the next week and may send a one-page list of the open bread invoices.

The $400 stays in current assets until one of those things happens. The Income Statement does not move because of the phone call.

Common mix-ups

Collections is not the accounts receivable account. The account is the asset on the Balance Sheet, and collections is the work to turn that asset into cash.

Collections is not the same as dunning. Dunning is the sequence of reminder notices, and collections is the whole follow-up, including calls and holds.

Collections is also not a write-off. A write-off removes a balance you will not collect, and collections is what you do before that.

Related terms

• Accounts Receivable Aging: A report bucketing open invoices by how long they have been outstanding.
• Dunning: The sequence of reminder notices sent as an invoice ages past due.
• Days Sales Outstanding: The average number of days it takes to collect an invoice.
• Accounts Receivable: Money customers owe the business for goods or services already delivered.
• Write-Off: Removing a balance from the books when it will not be collected or paid.
• Payment Terms: The agreed deadline and conditions for paying an invoice.
• Statement Of Account: A summary sent to a customer listing all open invoices and payments.
• Credit Limit: The maximum balance a customer is allowed to carry on account.