In one line
The money your clients owe you on invoices you have sent but not yet been paid for.
Also called AR, receivables, or the debtor book.
What it means in practice
Accounts receivable is the total of every invoice you have issued that is still unpaid. It is money you have earned and not yet received, which is why a business can be busy, profitable on paper and still short of cash.
Two numbers tell you whether yours is healthy: how much is outstanding, and how old the oldest invoice is. A large balance made of invoices sent this week is normal. The same balance made of invoices sent in June is a collection problem.
Example. You sent four invoices last month totalling $12,400 and two have been paid. Your accounts receivable is the $6,900 still outstanding.
Where it shows up on the paperwork
Accounts receivable is not a line on any document you send. It is the total of the documents themselves: every invoice issued and not yet settled. You see it as a figure in your books, or as the list on the accounts receivable screen if you keep one.
What goes wrong
- Treating a big receivable as a good sign. It is revenue you have earned and money you do not have, and the two are not the same thing.
- Watching the total instead of the ages. A rising total made of fresh invoices is growth; the same total made of old ones is a collection problem.
- Leaving disputed invoices in the pile month after month. A dispute is a decision waiting to be made, not a slow payment.
The tools for this
Related terms
- Aging reportA list of unpaid invoices sorted by how long they have been outstanding.
- Days sales outstanding (DSO)The average number of days it takes you to get paid after invoicing.
- Bad debtAn invoice you have decided you are not going to collect.
- Cash flowThe money moving in and out of your business, as opposed to the profit you have earned on paper.
- Remittance adviceThe note a client sends saying which invoices a payment covers.
- Statement of accountA summary of everything a client owes across all their open invoices.
Common questions
Is accounts receivable an asset?
Yes, a current asset: money owed to you that you expect to collect within the year. It sits on the balance sheet at the value of the unpaid invoices, less anything you have written off as unlikely to arrive.
What is a good accounts receivable balance?
There is no target figure, only a target age. If most of what you are owed was invoiced inside your payment terms, the balance is healthy at any size. If a third of it is over 60 days, the size does not matter.
How do I reduce accounts receivable?
Invoice the day the work finishes, keep terms short, put a payment link on the document, and chase from day one after the due date. Taking a deposit removes part of the balance before it exists.