What is Accounts Receivable?

Accounts receivable (AR) represents the money owed to a business by its customers for goods or services delivered on credit. It is recorded as an asset on the company’s balance sheet, reflecting the company’s right to receive payment in the future. Effective management of accounts receivable is crucial for maintaining cash flow, liquidity, and overall financial health.

The accounts receivable process typically involves issuing an invoice to the customer after delivering the product or service. The invoice specifies the payment terms, including the amount due, payment deadline, and any applicable discounts for early payment or penalties for late payment. Key aspects of accounts receivable management include establishing credit policies, ensuring timely and accurate invoicing, implementing effective collections procedures, and regularly monitoring accounts receivable aging to identify potential issues and take corrective actions.

Maintaining a healthy accounts receivable balance is essential for sustaining cash flow and supporting day-to-day operations. Businesses should aim to minimize the time it takes to convert receivables into cash, known as Days Sales Outstanding (DSO). Reducing DSO improves liquidity and reduces the risk of bad debts. Technological solutions, such as accounting software and automated invoicing systems, can enhance the efficiency and accuracy of accounts receivable management. By closely monitoring and managing AR, businesses can ensure a steady flow of funds and reduce the likelihood of cash flow problems.