What is Accounts Receivable (AR)?
The money owed to a business by its customers for goods or services delivered but not yet paid for.
Detailed Explanation
Accounts receivable represents the outstanding invoices a business has sent to customers and the money it expects to collect. The AR function encompasses invoicing (generating and sending accurate invoices promptly), credit management (assessing customer creditworthiness and setting terms), collections (following up on overdue payments systematically), cash application (matching incoming payments to invoices), and reporting (ageing analysis, bad debt provision). Effective AR management directly impacts cash flow — a business can be profitable on paper but cash-poor if receivables are not collected efficiently. The key AR metric is Days Sales Outstanding (DSO), which measures the average number of days it takes to collect payment after a sale.
Why It Matters
Late-paying customers effectively receive an interest-free loan from your business. Poor AR management creates cash flow pressure that can threaten the survival of even profitable businesses. In Australia, late payment is a significant issue for SMEs, making robust AR processes essential.
Example
A professional services firm has $800,000 in outstanding receivables with an average DSO of 65 days. By implementing automated invoice reminders at 7, 14, and 21 days overdue, offering online payment options, and introducing a structured collections escalation process, they reduce DSO to 38 days — freeing up over $300,000 in working capital.
Related Terms
The money a business owes to its suppliers and vendors for goods and services received but not yet paid for.
The process of monitoring, analysing, and optimising the timing and amounts of money flowing in and out of a business.
The end-to-end workflow of receiving, validating, approving, and paying supplier invoices accurately and on time.
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