Accounts Receivable Explained: What It Is and How to Manage It
Accounts receivable is money owed to a business by its customers. This guide explains what accounts receivable is, how to manage the collections process, and the key metrics finance teams track.
What Is Accounts Receivable?
Accounts receivable (AR) is the money owed to a business by customers who have received goods or services but have not yet paid their invoices. It appears as a current asset on the balance sheet. Good accounts receivable management is essential for cash flow — a profitable business can still struggle if customers take too long to pay.
The AR Process
The standard AR cycle: goods or services are delivered and an invoice is raised; the invoice is sent to the customer with payment terms (typically 30, 45, or 60 days); the finance team tracks outstanding invoices and follows up on overdue accounts; payment is received and matched to the invoice; the balance is cleared. In larger businesses, a dedicated credit control team manages this process.
Key AR Metrics
Days Sales Outstanding (DSO) = (Trade Receivables / Revenue) x 365. DSO measures how long customers take to pay on average. A lower DSO means cash is collected faster. Tracking DSO over time reveals trends in customer payment behaviour. Debtor ageing report: Shows outstanding invoices by age — current, 30 days, 60 days, 90+ days overdue. This is the primary tool for credit control prioritisation.
Managing Credit Risk
Before extending credit to a new customer, businesses typically run credit checks, set a credit limit, and agree payment terms. Concentration risk — where a large proportion of AR is owed by a small number of customers — is a significant risk that finance teams monitor. Provisions for doubtful debts are made where specific invoices are unlikely to be collected.
AR and Working Capital
Reducing DSO — collecting cash faster — directly improves working capital. Tactics include: issuing invoices promptly and accurately (disputes delay payment); offering early payment discounts; using automated payment reminders; and escalating overdue accounts systematically. AR management is examined in ACCA FM and is a practical daily reality for management accountants in most commercial businesses.
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Learnsignal Education Team
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