Accounts Receivable
Money owed to your business by customers for goods or services delivered but not yet paid for.
Definition
Accounts receivable (AR) represents the total amount of money customers owe your business for products sold or services rendered on credit. It's a current asset on your balance sheet, representing expected future cash inflows. Managing AR effectively is crucial for maintaining healthy cash flow.
AR includes all outstanding invoices that haven't been paid, from invoices issued yesterday to those months overdue. Most businesses track AR aging—categorizing receivables by how long they've been outstanding (current, 30 days, 60 days, 90+ days)—to identify collection priorities and potential bad debts.
Why It Matters
Accounts receivable directly impacts your business's cash position and working capital. High AR means significant money is tied up waiting for customer payments, which can create cash flow challenges even when sales are strong. Managing AR effectively is as important as generating sales.
AR aging analysis helps you identify problem accounts before they become uncollectible. Invoices that age past 90 days become increasingly difficult to collect—industry data suggests collection rates drop significantly after 90 days. Regular AR review enables proactive collection efforts while accounts are still recoverable.
Examples
- 1
A B2B company with $500,000 in AR and $100,000 monthly sales has 5 months of sales tied up in unpaid invoices—a potential cash flow concern.
- 2
An agency reviews AR aging weekly, following up immediately on any invoice that reaches 45 days outstanding.
- 3
A manufacturer reserves 2% of AR as allowance for doubtful accounts based on historical collection rates.
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