Current accounts receivable

Current accounts receivable is the sum of all outstanding invoices that customers owe to a business for products or services that have already been delivered. It appears as a current asset on the balance sheet because the business expects to collect payment within the normal operating cycle, typically 30 to 90 days.

Accounts receivable is created whenever a business extends credit to its customers rather than requiring immediate payment. When a B2B software company invoices a client for an annual subscription with net-30 payment terms, the invoice amount is recorded as accounts receivable until the payment is received. Upon payment, accounts receivable decreases and cash increases.

The metric matters because accounts receivable represents revenue that has been earned but not yet converted to cash. High or growing accounts receivable means money is tied up in unpaid invoices rather than being available for operations, investment, or debt repayment. This creates a gap between reported revenue and actual cash flow that can cause liquidity problems, particularly for fast-growing businesses where receivables grow alongside working capital pressure.

For SaaS businesses that collect payment upfront (monthly or annual subscriptions charged to credit cards), accounts receivable is typically small because payment is collected at the time of service. For B2B businesses that invoice enterprise customers with payment terms, accounts receivable can be substantial, sometimes representing two to three months of revenue sitting in unpaid invoices.

The accounts receivable balance is read directly from the balance sheet. The key derived metric is Days Sales Outstanding (DSO), which measures the average number of days it takes to collect payment after a sale is made.

DSO = (Accounts Receivable / Total Credit Sales) x 365

If a company has 1,200,000 pounds in accounts receivable and annual credit sales of 9,000,000 pounds, DSO is approximately 49 days. This means it takes an average of 49 days from invoicing to receiving payment.

The accounts receivable turnover ratio measures how many times per year the business collects its average receivables balance: AR Turnover = Net Credit Sales / Average Accounts Receivable. A higher ratio indicates faster collection.

The AR ageing report is the most actionable tool for managing receivables. It categorises outstanding invoices into time buckets: current (not yet due), 1 to 30 days past due, 31 to 60 days past due, 61 to 90 days past due, and over 90 days past due. The probability of collecting an invoice decreases sharply the longer it remains unpaid. Invoices over 90 days past due are collected less than 70% of the time.

Accounts receivable sits within the working capital framework as a current asset that directly affects cash flow. In the metric tree, it decomposes into the factors that determine how much cash is tied up in unpaid invoices. It connects to free cash flow through operating cash flow and working capital changes.

The tree shows that accounts receivable is driven by three factors: invoice volume and size (more sales on credit terms create more receivables), payment terms granted to customers (longer terms mean higher average AR), and collection effectiveness (how quickly and reliably the business collects what it is owed).

Accounts receivable has an inverse relationship with cash flow. When AR increases faster than revenue, it signals that cash is being consumed by growing receivables. When AR decreases relative to revenue, it signals improved collection efficiency and cash release. Fast-growing B2B businesses often find that their accounts receivable growth outpaces their revenue growth, creating cash flow pressure even as the business appears financially healthy on the income statement.

1. 1

   Invoice promptly and accurately

   Send invoices immediately upon delivery of goods or services. Delayed invoicing delays the payment clock. Ensure invoices are accurate and complete to prevent disputes that hold up payment. Errors in invoicing are one of the most common causes of late payment.

2. 2

   Tighten payment terms where possible

   Review whether net-60 or net-45 terms are truly necessary for each customer segment. Moving from net-60 to net-30 reduces DSO by 30 days and frees significant cash. New customers should start with shorter terms unless there is a competitive reason to offer longer ones.

3. 3

   Automate collections and payment reminders

   Implement automated dunning sequences that send payment reminders before the due date, on the due date, and at escalating intervals after. Automation ensures no invoice is forgotten and reduces the manual burden on the finance team.

4. 4

   Offer multiple convenient payment methods

   Make it easy for customers to pay by supporting credit cards, ACH transfers, direct debit, and online payment portals. The easier it is to pay, the faster payments arrive. Self-serve payment portals reduce friction significantly.

5. 5

   Incentivise early payment

   Offer small discounts for early payment, such as 1% off for payment within 10 days. The cost of the discount is often far less than the cash flow benefit of receiving payment 20 to 50 days sooner. Calculate the annualised cost to ensure it is below your cost of capital.