Accounts Receivable (AR) refers to the money owed to a company by its customers for products or services provided on credit. Essentially, AR represents outstanding invoices that haven't been paid yet, reflecting future cash inflows.
Companies commonly offer goods or services on credit terms, allowing customers time—typically 30, 60, or 90 days—to settle invoices. During this period, these unpaid balances are recorded as Accounts Receivable on the company's balance sheet as an asset, indicative of revenue already earned but not yet collected.
Proper management of AR plays a critical role in a company's financial health. Timely collection of outstanding invoices helps maintain cash flow and supports day-to-day business operations. Conversely, poor AR management can lead to liquidity issues, making it difficult to pay vendors, invest in growth, or cover other operating expenses.
Accounting teams frequently monitor metrics such as Days Sales Outstanding (DSO) to measure and optimize AR efficiency. Keeping AR levels reasonable compared to total sales helps businesses maintain financial stability and plan future expenditures confidently.
In short, effectively managing Accounts Receivable (AR) ensures businesses have a steady cash flow necessary for sustaining ongoing operations and fueling growth.
