Accounts Receivable (AR)

Accounts receivable is the total amount owed to a company by its customers for goods delivered or services completed but not yet paid for. It sits on the balance sheet as a current asset and represents cash that the business has earned but not yet collected. Managing AR — and financing it — is a direct way to improve short-term liquidity.

What It Is #

When a business sells on credit — which most B2B businesses do — it does not receive payment immediately. Instead, it issues an invoice and waits. That outstanding balance is accounts receivable: real value already earned, but temporarily inaccessible as cash.

AR management covers everything from issuing invoices correctly to collecting payment on time, and resolving disputes when they arise. Poor AR management leads to high DSO, cash flow gaps, and bad debt — invoices that are never paid.

Supply chain finance tools address AR from multiple angles. Invoice financing allows businesses to borrow against receivables before they are due. Factoring converts receivables into immediate cash by selling them outright. Early payment programmes — offered by buyers — incentivise faster collection through discounts.

The AR Lifecycle #

1. Sale completed — goods delivered or services rendered
2. Invoice issued — sent to customer with agreed payment terms
3. Invoice recorded — entered into the AR ledger as an asset
4. Payment monitoring — AR team tracks due dates and outstanding balances
5. Reminders and dunning — automated or manual follow-up as due dates approach or pass
6. Payment received — customer pays; AR entry is cleared
7. Dispute resolution — if customer disputes the invoice, credit notes or adjustments are issued
8. Bad debt write-off — if payment is not received, the AR entry is written off as a loss

Key AR Metrics #

Metric	What It Measures	Target Direction
Days Sales Outstanding (DSO)	Average days to collect after a sale	Lower
AR Aging	Distribution of receivables by age	More in 0–30 days bucket
Collection Effectiveness Index (CEI)	% of collectible AR collected	Higher (target: 95%+)
Bad Debt Ratio	Write-offs as % of total AR	Lower
Dispute Rate	% of invoices disputed by customers	Lower

AR Aging Report #

An AR aging report categorises outstanding invoices by how long they have been unpaid. It is the most important tool in collections management.

Aging Bucket	Risk Level	Action
0–30 days	Low	Monitor
31–60 days	Moderate	Send payment reminder
61–90 days	Elevated	Direct contact with customer
91–120 days	High	Escalate to collections
120+ days	Critical	Legal review; consider write-off

As invoices age, the probability of collection drops significantly. After 90 days, recovery rates typically fall below 70%. Invoice financing before invoices are overdue removes this risk entirely.

Financing AR #

Businesses do not need to wait for customers to pay. Two primary ways to convert AR into immediate cash are available:

Invoice Financing — borrow against the value of approved invoices. The receivable stays on the balance sheet as collateral; the business receives a cash advance and repays when the customer pays. Best for businesses that want to maintain customer relationships and keep collections in-house.

Factoring — sell invoices outright to a financial institution. Receive 80–90% of the invoice value immediately. The institution handles or monitors collections. The receivable is removed from the balance sheet. Best for businesses seeking off-balance-sheet financing and outsourced collections.

AR vs. Accounts Payable #

	Accounts Receivable	Accounts Payable
Represents	Money owed to the company	Money the company owes
Balance sheet	Current asset	Current liability
Working capital goal	Minimise DSO (collect sooner)	Maximise DPO (pay later)
SCF solution	Invoice financing, factoring	Reverse factoring, dynamic discounting
Risk	Bad debt, late payment	Supplier relationship strain