Definition

Collections is the process by which a company gets paid for its product/service offerings. The collection process begins once the company issues an invoice to its customers or requests payment towards its product/services. It is completed when a customer actually pays the company for the invoice raised.

Example

For instance, Vareto invoices a customer for its $100K annual contract. The customer pays the invoice in full two weeks later by wire transfer. Therefore, Vareto's collections will be = $100,000.

Why it matters

Revenue collection is a crucial component of any company’s cash flow and impacts its receivables. If a company is issuing invoices to customers and recognizing revenue, but it is not getting paid then it can be trouble. It is also important for a company to monitor its collections so as to understand how quickly or slowly customers are paying once an invoice has been raised.

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