How to Calculate Cash Collections from Accounts Receivable

Cash collections from accounts receivable (AR) show how much cash you’ve actually received from your customers during a specific period. To calculate cash collections from accounts receivable, add your beginning AR balance to credit sales and subtract the ending AR balance. This shows how much cash your business actually collected during a given period, giving you a clear picture of liquidity and the effectiveness of your collections process.

Gather Key Financial Data

Before you calculate, collect three main numbers:

• Beginning Accounts Receivable Balance – The total AR at the start of the period.
• Ending Accounts Receivable Balance – The total AR at the end of the period.
• Credit Sales During the Period – The total value of all sales made on credit (not cash sales).

Example:

• Beginning AR: $50,000
• Ending AR: $60,000
• Credit Sales: $200,000

Apply the Cash Collections Formula

The basic formula is:

Cash Collections = Beginning AR + Credit Sales – Ending AR

This formula works because:

• Beginning AR is what you expected to collect at the start.
• Adding Credit Sales accounts for all new receivables created.
• Subtracting Ending AR shows what’s still outstanding, leaving only what’s collected.

Example Calculation: Cash Collections = $50,000 + $200,000 – $60,000 = $190,000

Analyze the Result

Once you calculate cash collections, compare the number against your credit sales.

• If collections are close to total sales, you’re converting receivables efficiently.
• If collections are much lower, it may indicate payment delays, poor collections processes, or overdue invoices.

Example: With $200,000 in credit sales and $190,000 collected, the business has a 95% collection rate for the period, a strong sign of healthy cash flow.

Monitor Trends Over Time

One calculation isn’t enough, tracking collections month over month or quarter over quarter helps you see patterns.

• Improving trend – Shows faster payments or stronger credit control.
• Declining trend – May indicate customer cash flow issues, poor invoicing processes, or weak follow-ups.

Pro Tip: Create a simple spreadsheet where you record:

• Beginning AR
• Ending AR
• Credit Sales
• Cash Collections

This makes it easier to visualize trends and spot red flags early.

Use the Data to Improve Cash Flow

Once you know your cash collections, use the insights to:

• Adjust credit policies (stricter terms if collections are slow).
• Improve invoice follow-ups (send reminders sooner).
• Offer early payment incentives to customers.
• Strengthen collections processes if the gap between sales and cash keeps growing.

Example: Contractor Business

A construction contractor starts January with $75,000 in AR, ends January with $85,000 in AR, and makes $300,000 in credit sales that month.

Cash Collections = $75,000 + $300,000 – $85,000 = $290,000

This means while the business generated $300,000 in new receivables, it successfully converted $290,000 into cash during the period,  leaving $85,000 still pending.