Let’s Start with the Basics—What Even Is Accounts Receivable?
Picture this: You send an invoice, and now you’re just… waiting to get paid. That’s accounts receivable (AR) in action.
It’s the money your customers owe you after you’ve delivered the goods or services. You did your part, and now it’s their turn. But they get a little breathing room—maybe 15 days, maybe 30, maybe even 60. Until that money lands in your bank account, it sits on your books as accounts receivable.
In plain terms: It’s money coming your way.
On paper, it’s considered a current asset—meaning you expect to collect it within the next year. For most businesses, it’s usually much sooner than that.
How Does Accounts Receivable Actually Work?
Here’s the play-by-play:
- You sell something (product, service—whatever you’re offering).
- You don’t get paid right then and there.
- You send an invoice, maybe with Net 30 terms.
- The customer agrees to pay within that time.
- Until then, that amount is sitting in your books as accounts receivable.
Let’s break it down with a real-life example:
You run a small event planning business. A local restaurant hires you for a grand opening and agrees to pay $2,500 within 30 days. You complete the job, send the invoice, and now you wait. That $2,500 is your AR.
It’s not in your account yet—but you’re expecting it.
Why Accounts Receivable Matters More Than You Think
When you’re running a business, it’s easy to get excited about a sale.
But here’s the deal: A sale doesn’t count until the money hits your account. And that delay between the invoice and the payment? That’s where things can get a little tricky if you’re not paying attention.
AR is important because:
- It directly affects your cash flow. (No cash, no business—it’s that simple.)
- It helps you forecast future income. You know what’s coming, roughly when, and from whom.
- It’s a measure of trust and professionalism. If clients pay on time, awesome. If not, it’s a red flag.
If your accounts receivable gets bloated with late invoices and you’re not collecting fast enough, you’ll feel it. Even if your sales are through the roof.
The Different Flavors of AR (Yep, There Are Types)
1. Trade Receivables
This is your everyday AR. It’s from selling your actual products or services to customers on credit.
2. Notes Receivable
A bit more formal. Usually involves a written agreement and sometimes even interest. Think of it as a short-term loan from you to your customer.
3. Other Receivables
Random things like tax refunds, insurance claims, or loans to employees. Still money that’s owed to you—but not from a typical sale.
Wait—Isn’t That the Opposite of Accounts Payable?
Exactly.
Let’s clear it up with a simple table:
| Accounts Receivable (AR) | Accounts Payable (AP) | |
|---|---|---|
| You’re the… | Creditor | Debtor |
| Money goes… | To you | From you |
| Shows up as… | Current asset | Current liability |
| Good or bad? | Good (if collected!) | Expected (but you owe it) |
So if you’re a business that buys supplies on credit and sells to clients on credit—you’ve got both AR and AP in play. Tracking both helps you see your real financial position.
How to Record AR Without Overcomplicating It
Let’s say you’re a photographer and you shoot a wedding for $3,000. You invoice the client with Net 30 terms.
Here’s what happens in your books (if you’re using accrual accounting):
- Debit: Accounts Receivable $3,000
- Credit: Revenue $3,000
Boom. The revenue is recognized. The money hasn’t arrived yet, but you’ve done the work.
Now, when the client pays:
- Debit: Cash $3,000
- Credit: Accounts Receivable $3,000
Your AR goes down. Your bank balance goes up. Everybody’s happy.
The Tools That Make AR Less of a Headache
Let’s be honest—no one starts a business because they love chasing down unpaid invoices.
That’s where software can save your sanity.
Popular AR tools:
- QuickBooks: Classic and powerful. Great for growing businesses.
- FreshBooks: Loved by freelancers and small teams.
- Xero: Sleek and easy to use.
- Zoho Books: Budget-friendly and full of features.
Look for tools that:
- Send invoices automatically
- Remind clients (without sounding rude)
- Track who owes what and for how long
- Help you accept online payments fast
Automating your AR process = more time to focus on growing your business.
What’s the Accounts Receivable Turnover Ratio (And Should You Care)?
Yes, you should care—because it tells you how fast you’re getting paid.
The formula:
Net Credit Sales ÷ Average Accounts Receivable
Let’s say:
- Your net credit sales were $240,000 for the year
- Your average AR balance was $60,000
That’s 4 turns per year. You’re collecting every 90 days, on average.
Rule of thumb:
Higher = better.
Lower = sluggish AR.
Use this ratio to keep tabs on your payment speed and cash flow health.
Let’s Talk About What Can Go Wrong (So You Can Avoid It)
Accounts receivable is great until… it’s not.
Here are the common risks:
😬 Late payments
Your cash gets stuck, and you might struggle to cover bills.
😑 Unpaid invoices
Sometimes clients ghost. You’ve got to know when to escalate.
😕 Time sink
Manually chasing down payments eats up hours you could be using elsewhere.
Tip:
Before offering credit, vet your clients. Ask for references. Start with smaller jobs if you’re unsure. It’s okay to say no—or to ask for partial payment upfront.
Best Practices to Keep Your AR in Shape
If you’re feeling overwhelmed, here’s a cheat sheet:
Invoice ASAP
Send invoices right after work is done. Not a week later. Not next month.
Be crystal clear
Due dates, payment terms, late fees—spell it all out on the invoice.
Offer early payment perks
A small discount (say, 2%) can encourage faster payments.
Follow up without being annoying
Send polite reminders at regular intervals. Most delays aren’t personal.
Keep an AR routine
Review unpaid invoices weekly. Don’t let things slide.
Know when to escalate
If someone is way past due, get on a call—or consider a collections agency.
Your time is valuable. So is your energy. Protect both.
Some Real-World Examples That Bring AR to Life
The Baker
You run a bakery that supplies pastries to a local hotel. Every Monday, they place an order and you deliver. You invoice them every Friday. That invoice is your AR until the check clears.
The Freelancer
You’re a copywriter. You wrap up a website rewrite and send a $1,200 invoice. The client has 30 days to pay. That $1,200 is sitting in your AR until it hits your Stripe or bank account.
The Big Business
A marketing firm lands a $100,000 campaign deal. They break the project into phases and invoice after each one. At any given time, several invoices may be in AR while the work continues.
Quick FAQs
Is AR a good thing?
Yes—but only if it gets paid on time.
Is AR income?
Not exactly. It represents income you’ve earned, but it’s not cash yet.
What if a client never pays?
You’ll write it off as a bad debt. Not fun, but sometimes necessary.
Can I charge late fees?
Yes, if you state them clearly in your contract or invoice terms.
The Bottom Line
Here’s the truth: You can’t manage what you don’t measure.
If you’re not keeping a close eye on your AR, you could be making sales all day long and still be short on cash. And if you’re not getting paid fast enough, it can snowball—late payroll, late rent, stress headaches.
But when you stay on top of your AR game? You’re not just getting paid—you’re taking control of your cash flow, your time, and your business future.
So pull up your AR report. See what’s overdue. Follow up. And make it a habit.
