Accounts Receivables (AR) or Receivables
Accounts receivable (AR) are the amounts owed to a company by its customers for goods or services delivered or used but not yet paid for. These are typically the result of credit sales, where the company offers the product or service upfront while allowing the customer to pay at a later date. This arrangement makes accounts receivable a critical component of a company’s current assets, reflecting on the balance sheet.
The management of accounts receivable is a key aspect of a company’s working capital management. It involves extending credit to customers, billing them after a sale, and then collecting the amounts due within the agreed payment period. The efficiency with which a company manages its accounts receivable directly impacts its cash flow and overall financial health.
Accounts receivable are often considered a form of short-term, interest-free loan extended to customers. The credit terms typically range from a few days to a year and are governed by the company’s credit policy. This policy dictates who is offered credit, the length of the credit period, and the collection process for overdue accounts.
Effective accounts receivable management entails not only extending credit to creditworthy customers but also actively pursuing overdue accounts to reduce the days sales outstanding (DSO) – a key metric that indicates the average time it takes for a company to collect payments after a sale has been made. Lower DSO values signify more efficient collections and better liquidity.
Accounts receivable are also subject to credit risk, which is the risk of customers not paying their dues. Therefore, businesses often use various methods to mitigate this risk, such as credit checks, credit insurance, and factoring.
In summary, accounts receivable represent an essential component of a company’s financial operations, indicative of both its revenue generation and its credit practices. Efficient management of accounts receivable is crucial for maintaining a healthy cash flow and ensuring the company’s financial stability.
« Back to Glossary Index