Definition of Accounts Receivable (AR)
Accounts Receivable (AR) refers to the money owed to a business by its customers for goods or services that have already been delivered but not yet paid for. When a company allows customers to pay after delivery—under terms such as Net 30, Net 60, or Net 90—the unpaid balance is recorded as accounts receivable. AR appears on the balance sheet as a current asset because it is expected to convert into cash in the near term.
What Accounts Receivable Includes
Accounts receivable includes unpaid invoices issued to customers for completed sales. This can cover subscription invoices, usage charges, milestone-based invoices, or one-time product sales delivered on credit. AR does not include future contracted revenue that has not yet been invoiced, nor does it include cash already received.
How Accounts Receivable Works
When a sale is made on credit, revenue is recognized and an invoice is issued to the customer. Until the customer pays, the invoice amount remains in accounts receivable. Once payment is collected, AR decreases and cash increases. The time between invoicing and payment directly affects a company’s cash flow.
Accounts Receivable Explained for a General Audience
Accounts receivable is essentially money a business is waiting to receive. It represents bills that customers still need to pay. Even though the company has done the work or delivered the product, the cash has not yet arrived. If too much money is stuck in receivables, the business may struggle to cover its own expenses despite being profitable on paper.
Accounts Receivable and Cash Flow
AR has a major impact on cash flow. High receivables mean cash is tied up outside the business. If customers pay slowly, the company may face liquidity pressure even with strong sales. Efficient AR management ensures that revenue turns into usable cash quickly.
AR and Days Sales Outstanding (DSO)
A common metric used to track AR performance is Days Sales Outstanding (DSO), which measures the average number of days it takes to collect payment after a sale. Lower DSO indicates faster collections and healthier cash flow. Higher DSO signals delayed payments and potential collection risk.
AR and Working Capital
Accounts receivable is a key component of working capital. While AR is an asset, excessive receivables can strain operations by reducing available cash. Companies must balance offering flexible payment terms to customers with maintaining sufficient liquidity to operate smoothly.
AR Management and Collections
Managing AR involves invoicing accurately, following up on unpaid balances, and running effective collections and dunning processes. This may include reminder emails, payment retries, escalation procedures, or offering structured payment plans to ensure timely collection without damaging customer relationships.
AR and Financing
Accounts receivable can also be used as a financing asset. Some businesses sell or finance receivables to access cash sooner rather than waiting for customer payments. In models like True Sale financing, recurring receivables or contracts are treated as assets that can be converted into upfront capital, improving liquidity without taking on traditional debt.
Summary
Accounts Receivable represents revenue that has been earned but not yet collected. It is a critical asset that directly affects cash flow, liquidity, and working capital. Effective AR management ensures that sales translate into real cash in a timely manner, supporting healthy operations and sustainable growth.
