Accounts Receivable
What does it mean
Accounts Receivable (AR) is the term that represents the combined total of all unpaid invoices that exist for a business. When a business provides a good or service, many times, the payment for these goods/services does not occur until after a period of time has past. The allowable period of time is described as the credit terms of the invoice. These credit terms indicate the allowable period of time to make the cash payment without being viewed as delinquent or charged a penalty. Typical credit terms range from 14 days to 60 days and vary by industry.
It is important to know that Accounts Receivable is a very fluid figure.
Why does it matter
There is a few reasons why Accounts Receivable matter. The first is that changes in Accounts Receivable can give you an indication of current revenue for the business. If you see a drop in outstanding accounts receivable, it means that past invoices are being collected faster then new invoices are being generated. This could indicate a slow down in revenue.
Additionally Accounts Receivable will typically play a role as collateral for lines of credit; so monitoring AR balances relative to Lines of Credit balances is very important.`
What to pay attention to
- Changes in balances over time to gauge things like:
- Changes in Revenue - If revenue increases, likely AR will increase as well. If revenue decreases, likely AR will decrease as well.
- Changes in AR Credit Terms - If customers are allowed more days to pay their bill, the combined outstanding bills will go up. This may be a good thing to encourage additional sales, but it may also increase ultimate collection risk because the customer is taking additional time.
- Customers struggling to meet obligations
- Aging of Receivables - As receivables get older, they are less likely to be collected. When a receivable is deemed as uncollectible, it will show up as a bad debt expense on the income statement for a corresponding amount.
Other Relevant Terms
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