what is an account receivable

Imagine you’ve just delivered a fantastic service to a customer or shipped them a great product. Instead of receiving cash on the spot, they ask to pay you later. That promise of future payment is the heart of your business’s cash flow, and it’s recorded as a specific type of asset. So, what is an account receivable? In simple terms, it’s money that a company is legally entitled to receive from its customers for goods or services already provided on credit.

Think of it as an IOU from your customer. It’s a current asset on your balance sheet because you expect to collect that cash, typically within a short period like 30, 60, or 90 days. This system of selling on credit is fundamental to most businesses, allowing them to build strong customer relationships and facilitate larger sales.

What is an Account Receivable and How Does It Work?

The process usually starts with an invoice. Once you send that invoice, you create an account receivable. Your accounting team then tracks this invoice, monitoring when it’s due and following up if the payment is late. When the customer finally pays, the account receivable is decreased, and your cash account is increased. This cycle is a continuous part of business operations for everything from a local marketing agency to a large manufacturing firm.

Why Managing Receivables is So Important

While accounts receivable are assets, they aren’t cash in the bank yet. Their effective management is crucial for your company’s financial health. When customers pay slowly or not at all, it can create a cash flow crunch, making it difficult to pay your own employees and suppliers. Keeping a close eye on your receivables helps ensure you have the liquid funds needed to keep the business running smoothly.

Keeping Your Receivables Healthy

A few simple practices can make a big difference. First, be clear about your payment terms upfront. Send invoices promptly and ensure they are accurate and easy to understand. It’s also wise to implement a gentle but consistent follow-up procedure for overdue payments. Many businesses also perform credit checks on new customers before extending credit to minimize the risk of non-payment.

In essence, accounts receivable are a testament to the trust you place in your customers. They represent future cash and sales you’ve already earned. By understanding what they are and managing them carefully, you can build stronger client relationships while protecting your business’s most vital resource—its cash flow.