What is Accounts Receivable?
Learn what accounts receivable is, how it affects your cash flow, and how businesses can leverage outstanding invoices for financing.
Accounts receivable (AR or A/R) is money owed to your business by customers for goods or services you have delivered but have not yet been paid for. On your balance sheet, accounts receivable is a current asset — it represents cash you expect to collect within the near term.
How Accounts Receivable Works
When you sell products or services on credit (invoicing customers rather than collecting payment immediately), you create accounts receivable. Common payment terms include Net 30 (payment due in 30 days), Net 60, or Net 90.
- Invoice issued: You deliver goods or services and send an invoice
- Receivable recorded: The invoice amount becomes accounts receivable
- Payment received: When the customer pays, AR decreases and cash increases
- Aging: Receivables are tracked by age (current, 30 days, 60 days, 90+ days)
Accounts Receivable and Cash Flow
High accounts receivable can create cash flow problems. You have already delivered value but have not received the cash. Meanwhile, you may need to pay suppliers, employees, and other expenses.
The Cash Flow Gap
If you pay suppliers in 30 days but customers pay you in 60 days, you face a 30-day cash flow gap. This gap grows as your business grows, often requiring working capital financing.
Aging Reports
An accounts receivable aging report categorizes receivables by how long they have been outstanding:
- Current: Not yet due (still within payment terms)
- 1-30 days past due: Slightly overdue but typically still collectible
- 31-60 days past due: Concerning — follow-up needed
- 61-90 days past due: Significant collection risk
- 90+ days past due: Bad debt risk — may require write-off
Financing Against Receivables
Accounts receivable can be used to access financing:
- Invoice factoring: Sell your invoices to a factor for immediate cash (typically 80-90% of value)
- Invoice financing: Borrow against receivables while retaining collection
- Asset-based lending: Use receivables as collateral for a line of credit
Managing Accounts Receivable
Good AR management improves cash flow:
- Invoice promptly when work is completed
- Set clear payment terms and communicate them upfront
- Offer early payment discounts when cash flow benefits justify the cost
- Follow up on overdue accounts systematically
- Consider requiring deposits or progress payments for large projects
Track your Days Sales Outstanding (DSO) to measure collection efficiency. If DSO is increasing, investigate why customers are paying more slowly.
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Read more →Important Disclosure
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