Accounts Receivable

Accounts receivable (AR) is the money your customers owe you. When you deliver a product or service and send an invoice with net-30 payment terms, that invoice amount sits in accounts receivable until the customer pays. AR is an asset on the balance sheet, but it is not cash. A company can have $500,000 in accounts receivable and still be unable to pay its bills if customers are slow to pay.

Managing accounts receivable efficiently is crucial for cash flow. Key metrics include Days Sales Outstanding (DSO), which measures the average number of days it takes to collect payment. A DSO of 45 means you wait an average of 45 days after a sale to get paid. High DSO ties up cash and increases the risk of bad debt. Best practices include clear payment terms, automated invoicing, prompt follow-up on overdue invoices, and offering small discounts for early payment.

For B2B businesses, accounts receivable management can make or break the company. Extending credit to customers is often necessary to win business, but it creates risk. A major customer defaulting on a large invoice can be catastrophic. Credit checks before extending terms, credit limits, and diversifying the customer base all reduce AR risk. Some businesses sell their receivables (factoring) to get immediate cash at a discount.