What Is Accounts Receivable?
Accounts receivable is money owed to you by customers. Slow-paying customers are a hidden cash drain.
Key Takeaways
- Accounts receivable (AR) is money owed to your business by customers who have received goods or services.
- High AR relative to revenue signals slow-paying customers and cash flow risk.
- Days Sales Outstanding (DSO) measures how long customers take to pay.
What accounts receivable is
When you deliver goods or services and issue an invoice, the amount on that invoice becomes accounts receivable — a current asset on your balance sheet. The customer owes you that money. Until they pay, it is a promise, not cash. For B2B businesses especially, AR can represent a significant portion of working capital.
Days Sales Outstanding
DSO is the average number of days it takes your customers to pay after invoicing. If your payment terms are 30 days but your DSO is 52 days, customers are paying you 22 days late on average. Every day of DSO above your terms represents cash you're owed but haven't received. Reducing DSO by even 10 days can significantly improve your cash position.
Why AR management matters
A common SME trap: rapid revenue growth accompanied by a surge in AR, because new customers are slow payers. The business looks profitable on paper but runs cash-light because all the new revenue is sitting in unpaid invoices. This is how growing businesses run out of cash.
Practical AR management
Invoice immediately on delivery. Set clear payment terms and communicate them before the job starts. Send automated payment reminders at 7 days before due, on the due date, and 7 days after. Offer early payment discounts for your largest accounts. For persistent late payers, consider requiring deposits or advance payment.