How Accounts Receivable Work
When a business completes work and issues an invoice:
- Revenue is recorded.
- Payment terms are established (e.g., Net 30, Net 45, Net 60).
- The invoice remains outstanding until payment is received.
Until cash is collected, that balance sits on the balance sheet as accounts receivable. While AR reflects earned revenue, it does not represent available cash.
Why Accounts Receivable Impacts Cash Flow
Accounts receivable affects working capital because:
- Payroll and operating costs must be paid before invoices are collected.
- Materials and equipment often require upfront payment.
- Delayed payments extend cash conversion cycles.
A company may be profitable on paper but constrained in practice if a large percentage of revenue is tied up in receivables.
Managing AR aging and collection timelines is critical to maintaining healthy cash flow.
