What Is Accounts Receivable and How Does It Affect Your Cash Flow?
A plain-English explainer on accounts receivable — how AR works, what AR aging means, and how outstanding invoices affect your cash flow and balance sheet.
Accounts receivable (AR) is the money your customers owe you for work you've completed or products you've delivered but haven't been paid for yet. Every time you send an invoice and wait for payment, that outstanding amount is part of your accounts receivable.
Understanding AR is important because it's one of the most common reasons healthy businesses run into cash flow problems.
How Accounts Receivable Works
When you deliver a service or product and invoice a client, two things happen:
- You record revenue: your Profit and Loss shows the income as earned
- You record a receivable: your Balance Sheet shows money owed to you as an asset
The receivable stays on your books until the client pays. Once payment arrives, the receivable clears and cash goes up.
The gap between those two events (delivering work and receiving payment) is where cash flow problems happen.
AR Aging
AR aging is a report that groups your outstanding invoices by how long they've been unpaid.
|
Age |
What it means |
|
0-30 days |
Normal: most clients pay within terms |
|
31-60 days |
Starting to be late: worth following up |
|
61-90 days |
Overdue: follow up directly |
|
90+ days |
At risk: consider escalating collection efforts |
Your NCO bookkeeper can pull an AR aging report from QBO any time. Reviewing it monthly helps you catch slow payers before they become a real problem.
How AR Affects Cash Flow
AR affects your cash flow in two main ways.
Timing gaps: If you invoice $20,000 in December but clients don't pay until February, you have $20,000 in revenue on paper, but not in your account when your January expenses come due.
Bad debt: If a client never pays, you eventually have to write off the invoice as a bad debt. This removes it from AR and records a loss. The cash you expected never arrives.
Ways to protect your cash flow:
- Shorter payment terms (Net 15 or Net 30 instead of Net 60)
- Deposits or retainers upfront: collect a portion before work begins
- Follow up promptly: a polite reminder at 30 days prevents most late payments
- Late payment fees: state them in your contract and on your invoices
Abnormal Procedures
A client isn't paying and you've followed up multiple times.
Start by sending a formal written demand for payment. If that doesn't work, options include a collections agency, small claims court (for smaller amounts), or a lawyer's demand letter. Let your NCO bookkeeper know: the invoice may need to be written off as bad debt at year-end if it's unrecoverable.
A client disputes an invoice.
Put the disputed amount on hold and work to resolve the issue directly. Don't write it off until the dispute is settled. Your bookkeeper will keep it in AR while it's unresolved.
You need to issue a credit note instead of collecting payment.
See: How to Record a Refund or Credit Note for a Customer.
FAQ
Is accounts receivable an asset or income?
Both, at different stages. When you send the invoice, it becomes income on your P&L. Simultaneously, the outstanding amount sits on your Balance Sheet as a current asset (money you're owed). When the client pays, cash goes up and the receivable goes away.
What's the difference between AR and cash flow?
AR is a balance: what you're owed at a point in time. Cash flow is a movement: what's actually going in and out of your bank account. You can have high AR and low cash at the same time.
How do I know my total AR at any point?
In QBO, go to Reports > Accounts Receivable Aging Summary. It shows every outstanding invoice grouped by age.
Do I need to charge sales tax on my invoices?
If your business sells taxable goods or services in California, you may be required to collect and remit California sales tax. The rules depend on your business type and revenue. See: How to Set Up Sales Taxes in QuickBooks Online, or ask your NCO advisor.