Collections

What it measures

Every dollar of cash that lands in company bank accounts from customers during the period — payments against both current and prior invoices, across wire, ACH, card, and check — net of refunds and chargebacks. It does not measure revenue earned; a paid annual invoice is collected in full on the day cash clears, even though the revenue recognizes ratably over the contract term.

Why it matters

Revenue keeps score; collections keep you alive. Revenue is recognized when earned, but only collected cash pays salaries, vendors, and debt service. A business can post record revenue and still run out of money if customers pay late or never. Investors and lenders compare collections to revenue to flag aggressive revenue recognition, deteriorating customer credit, and the working-capital drag of slow payment — which is why collections is tracked as its own line, not folded into revenue.

How to read it

Read collections against the revenue and billing terms that produced them, never in isolation. Divide collections by revenue recognized in the same period to get a rough cash-conversion rate, and watch the trend: a persistent gap signals a receivables problem, not a one-off. Annual-upfront SaaS will see collections lumped at contract anniversaries; monthly billing produces a smoother line. Spiky, concentrated collections often point to customer-concentration risk or uneven contract start dates. Pair the trend with Days Sales Outstanding — if DSO is climbing while collections lag, cash is getting stuck in A/R.

What good looks like

Watch-outs

• Counting revenue as collections. Revenue is earned; collections is cash. You can grow revenue while collections fall — customers stretch payment, you loosen terms, or invoices age into A/R. Always model the two as separate lines and reconcile collections to bank statements, not the invoice ledger.
• Crediting deferred revenue to the wrong period. A $120K annual prepayment is $120K of collections in the month it clears and $0 in the following eleven months, even though revenue recognizes $10K a month across the year. Never spread a single cash receipt across future collections.
• Treating credits and refunds the same. A credit memo applied to a future invoice is not cash and does not belong in collections; it simply reduces the cash due on that later invoice. A cash refund is a real outflow and reduces collections in the period it is paid. Track them on different lines.
• Mixing cash and accrual basis. Collections is cash-basis only. If you invoice $100K in December but nothing clears, December collections are $0 regardless of the $100K accrual revenue. Tie the number to deposits, not to issued invoices.

Worked example