Financial Glossary
Accounts receivable
Accounts receivable (AR) is the aggregate amount a business is legally owed by customers for goods or services delivered but not yet paid. It appears on the balance sheet as a current asset because payment is expected within the operating cycle, typically within 30 to 90 days. AR is created when revenue is recognized before cash is collected -- common in B2B billing, corporate group-booking invoicing, and service retainers. Key metrics derived from AR include days sales outstanding (DSO), calculated as (AR divided by annual revenue) multiplied by 365, and AR aging, which classifies outstanding balances by how long they have been unpaid.
Problem & Application
A property management company bills clients at month-end and carries $85,000 in AR. Its annual revenue is $1.02 million, implying a DSO of (85,000 divided by 1,020,000) multiplied by 365, or approximately 30.5 days. If DSO drifts to 45 days the following quarter -- because two anchor clients began paying on extended terms -- AR grows to roughly $127,500 for the same revenue base. That $42,500 increase in AR represents cash that has been earned but is sitting in clients' bank accounts instead of the company's. If the business carries $100,000 in monthly operating expenses, the cash gap created by slow collections can force the owner to draw on a line of credit or defer payroll. Monitoring AR aging weekly, sending automated payment reminders at 15 and 30 days past due, and enforcing late-payment clauses in service agreements are the operational habits that keep DSO from silently eroding cash position.
In Short
Accounts receivable is an essential part of a company’s working capital. Proper management of receivables helps businesses maintain healthy cash flow, reduce the risk of bad debts, and ensure financial stability.