Accounting & Finance

Navigating Accounts Receivable for Your Small Business

Read Time: 5 min

a person choosing an accounts receivable turnover binder from a line of other binders

Starting with your accounts receivable is wise if you’re looking to get a handle on your accounting practices. The truth is, billing a client is essential in any business. The money a business bills for goods or services but has yet to receive is its accounts receivable. To keep track of their finances, businesses that use this model must record all payments so they know who owes them and how much. As a business owner, it’s important to keep track of these transactions to ensure your customers and clients pay their outstanding invoices. Analyzing your accounting practices and understanding figures like your accounts receivable turnover ratio can help you get the full picture of your business’s financial health. This is additionally helpful if you’re seeking business funding because lenders sometimes consider accounts receivable an asset.

What are Accounts Receivable?

Accounts receivable refer to goods, money, or services that contractors or customers owe a business. Customers don’t always pay bills at the same time that they buy something. Some businesses provide goods and services immediately and collect payment later. AR does not refer to an immediate exchange. Instead, a business might deliver the order and send an invoice for the customer to pay after 30 to 90 days. Accounts receivable are a vital part of a business’s finances. Customers or clients order your goods or services but haven’t paid for them yet. These are legally enforceable claims for payment regarding goods you supply or services you render.

Are they considered revenue?

Accounts receivable refer to the money a business has yet to receive from its customers for the goods or services provided by the business. While that might sound like a form of revenue, it depends on how a business organizes its balance sheet. Each business varies and AR only count as revenue in some cases. Cash-based businesses can and should not include their AR as revenue. However, businesses that use accrual-based accounting can include accounts receivable as revenue once the transactions are complete.

Where can I find them?

You should be able to find a business’s accounts receivable on its balance sheet. Specifically, they should be in the assets section. The business should list AR as a current or long-term asset, depending on the timeline of each transaction. Businesses should list AR as an asset because they are not currently cash revenue, but they will be in the future.

Accounts Receivable vs. Accounts Payable

While they sound similar, accounts payable and receivable are completely different things. They are essentially opposites with notable differences. Accounts payable refers to the debt a business owes.

Generally, accounts payable are a liability, while accounts receivable are an asset. Accounts payable refers to cash outflows and credit purchases. Receivable refers to cash inflows and credit sales.

The Benefits of Accounts Receivable

In most retail circles, transactions are paid and completed immediately. In other industries, customers are given an invoice to be paid at a later date. Accounts receivable account for the invoicing, collecting, and documenting of money owed to a business by its customers. Keeping track of them helps businesses to properly bill their customers. It also helps the business manage its cash flow. A business that does not accurately track AR may end up providing goods or services to customers for free, forgoing any profits. Tracking accounts receivable documents proof of income, which is important come tax season. You can keep your AR manageable with a consistent and routine tracking system.

What is an Accounts Receivable Turnover Ratio?

An accountant looking at their accounts receivable documents with a pencil

Accounts receivable are a balance of money due, but not yet actually paid. Customers make purchases on credit and choose to pay for them at a later date. Recording AR is all about keeping track of money owed to the business in the short term. Terms typically range from a few days or months to a fiscal or even calendar year.

Most businesses still operate while supplying a portion of their sales on credit. A business may offer credit to repeat or frequent customers, subscribers, or installment payers. The accounts receivable turnover ratio is a mathematical calculation that, at its core, tells a business how good its customers are at paying their bills on time. It measures how well a business uses and manages the credit extended to its customers.

In a way, AR is short-term debt, and the goal is to collect on the debt by getting your customers to complete their payments. The accounts receivable turnover ratio measures the number of times a business has collected on its outstanding invoices during an accounting period. This evaluation determines the success of a business in terms of securing profits from AR.

Are Accounts Receivable an Asset? We Think So

Accounts receivable are a vital part of a business’s profitability as it helps to indicate the business’s total income. Lenders consider them an asset because they represent money that will be coming to the business.

While you can record AR as an asset on a balance sheet, that money is theoretical for the time being. Only once the customer pays and completes the invoice does the business see a profit. You can record AR on a business’s balance sheet because there is a legal obligation for the customer to pay their debt to the business. They are current assets because the account balance is due in one year or less. They represent sales made on credit that the business simply has not yet collected money for, even though the customer already has access to the goods or services.

Accounts receivable also work as an asset if a business needs to sell these debts (outstanding bills) to a finance company. If a business needs cash and cannot wait for payment from clients or customers, they can sell off that debt for up to 90% of their original value. This practice is called invoice financing or AR financing.

Now that you know how to measure your accounts receivable and find your turnover ratio, you can use these tools to get a better idea of your business’s financial health.

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