What are accounts receivable (AR)?

Introduction to accounts receivable (AR)

Accounts receivable (AR) refer to the money a company is owed by its customers for goods or services delivered but not yet paid for. AR is a critical component of managing working capital and liquidity, and it is recorded as a current asset on the balance sheet because it represents cash that is expected to be collected in the short term, typically within 30 to 90 days.

Accounts receivable are vital for businesses that operate on credit. They provide flexibility for customers while creating opportunities for revenue growth. However, effective management of AR is crucial to ensure timely cash collection, minimize risks, and maintain a healthy cash flow.

By contrast, accounts payable refer to the money a company owes to suppliers, vendors, or contractors for goods or services that have been received but not yet paid for.

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What is AR management?

Efficient AR management ensures that a business collects payments on time and minimizes the risk of bad debts (unpaid invoices). Key practices include:

• Clear credit policies: setting guidelines for who can receive credit and on what terms.
• Invoicing and follow-up: issuing invoices promptly and sending reminders for overdue payments.
• Monitoring: regularly reviewing AR aging reports to track overdue accounts.
• Factoring or financing: using AR financing or selling AR to a third party (factoring) to access cash more quickly.