Accounts Receivable

Accounts receivable means money customers owe a business for goods or services it has already billed but has not yet collected.

Why accounts receivable matters to people buying a small business

An invoice shows an amount billed. It does not put the cash in the bank. If customers pay less than billed, or do not pay at all, gross receivables may overstate expected collections. An allowance for doubtful accounts may already reduce the reported balance, but receivables are not cash available to spend.

A buyer can review past-due and disputed invoices in the receivables aging report, then match them to payments received after the report date. Ask why any balances remain open and whether the reported amount includes an allowance for doubtful accounts. Collection rates vary by business; there is no standard to assume.

Customer payments fund day-to-day operations. A business may have finished the work and still be waiting for the money. The working capital due diligence guide puts that delay in the context of what it takes to keep operating.

How accounts receivable is used

Receivables records list outstanding customer balances. Buyers use them to separate what has been billed from what has arrived. Collection history gives those balances meaning; the seller's expectation does not.

For example, suppose a repair business finishes a job and invoices the customer. The customer disputes part of the charge and pays the rest. The invoice shows what was billed. The payment shows what was received.

The remaining balance needs an explanation. It may still be in dispute, or the business may never collect it. Until that is known, counting the full invoice as cash is a mistake.

Not every unpaid invoice is a loss, though. A payment that isn't due yet and a balance that will never be paid are different situations.

Common mistakes with accounts receivable

Treating receivables as cash available today is a mistake. Even a collectible invoice may be paid after the business's bills come due.

The opposite mistake is reading every open balance as a sign of weak customers. Many businesses are paid after they deliver. Why a balance is unpaid is what matters.

Buyers also look at the total balance without asking about the collection history behind it. The useful question is what the business has actually collected on its bills in the past.

Related terms

Working capital places receivables alongside other resources used in daily operations. Proof of cash checks financial records against cash movement, which is a different question from whether an open customer balance will be collected.

Source notes

The source is an interview on The SMB Investor podcast; examples are our own.