Accounts Receivable


Accounts receivable is a vital component of a company’s financial health. It represents the money owed to a business by its customers for products or services rendered. Managing accounts receivable efficiently is crucial for maintaining cash flow, sustaining operations, and ensuring long-term profitability. 

What Is Accounts Receivable?

Accounts receivable (AR) is the amount of money a business is owed by its customers or clients. It typically arises from sales made on credit, where the customer is given a certain period, known as credit terms, to pay for the goods or services. This creates a short-term asset on the company’s balance sheet, representing the amount expected to be received in cash.

Why Is Accounts Receivable Important?

  1. Cash Flow Management: Efficient AR management ensures a steady inflow of cash, allowing a company to meet its short-term obligations such as paying suppliers, covering operating expenses, and investing in growth opportunities. Cash flow is the lifeblood of any business, and poorly managed AR can lead to cash shortages and financial instability.
  2. Working Capital: AR is a critical component of a company’s working capital, which is the capital available for day-to-day operations. Maintaining a healthy working capital balance is essential for business sustainability, as it helps cover unforeseen expenses and provides the ability to seize opportunities as they arise.
  3. Profitability: Timely collection of receivables contributes directly to a company’s profitability. Delayed or unpaid invoices can erode profits, as businesses may need to allocate resources to debt recovery or write off bad debts, negatively impacting the bottom line.
  4. Customer Relationships: Effective AR management can also enhance customer relationships. Clear communication and prompt handling of invoicing and payment issues demonstrate professionalism and reliability, fostering trust and loyalty.

What Issues Can Arise With Poor Accounts Receivable Monitoring?

Accounts receivable fraud is surprisingly common, though easily avoidable with the right checks in place. Some examples of fraud that can take place within AR include lapping and skimming. Lapping is a scenario in which a payment is stolen and future receivables are used to cover up the theft. Skimming on the other hand is when unexpected payments (for example from old accounts that have already been written off) or refunds are diverted and stolen. Both of these types of fraud can be avoided with careful receivables tracking and using proper AR practices.

Best Practices for Managing Accounts Receivable

  1. Establish Clear Credit Policies:
    • Define credit terms, credit limits, and approval processes for extending credit to customers.
    • Perform credit checks on new customers to assess their creditworthiness.
  2. Accurate and Timely Invoicing:
    • Create detailed, accurate invoices with clear payment terms and due dates.
    • Send invoices promptly after delivering products or services.
  3. Monitor Aging Receivables:
    • Track the aging of receivables to identify overdue accounts and take action promptly.
    • Segment customers based on payment history to prioritize collections efforts.
  4. Offer Payment Options:
    • Provide convenient payment options such as online payments, credit card payments, and electronic funds transfer.
    • Offer discounts for early payments to incentivize prompt settlements.
  5. Implement a Collections Process:
    • Have a systematic process for following up on overdue invoices, which may include reminder emails, phone calls, and formal collection letters.
    • Consider offering payment plans or negotiating settlements for customers experiencing financial difficulties.
  6. Use AR Management Software:
    • Invest in accounting software or specialized AR management tools to automate invoicing, track receivables, and generate reports for analysis.
  7. Regular Reconciliation:
    • Reconcile accounts receivable records with the general ledger to ensure accuracy in financial statements.
  8. Maintain Open Communication:
    • Foster open and transparent communication with customers regarding payment issues, disputes, or concerns.


Accounts receivable management is a critical aspect of running a successful business. It directly impacts cash flow, working capital, profitability, and customer relationships. By implementing best practices, establishing clear policies, and using modern AR management tools, businesses can effectively manage their accounts receivable, avoiding common fraud such as lapping or skimming and ensuring financial stability and long-term success. Don’t underestimate the power of a well-managed AR process; it can be the key to your business’s growth and sustainability. AIR Consulting has many years of experience managing AR processes for companies of all types and sizes. If you have any questions about how we can help you, please visit our Contact Page to get started.