Definition (canonical)
Accounts receivable (AR) is money customers owe you for invoices already issued — sales the income statement has booked but the bank account hasn't seen. It sits as an asset on the balance sheet, yet behaves like an interest-free loan you extend to customers: every day an invoice waits, you finance their business with yours.
Measuring the trap — DSO and aging
DSO (Days Sales Outstanding) = AR ÷ revenue × days in period — the average wait between invoice and cash. Read it against your stated payment terms: terms of 30 with DSO of 52 means the real terms are 52 and the contract is fiction. Trend beats level: DSO creeping up while sales grow is the classic silhouette of growth funded by unpaid invoices. The aging report (buckets: current / 1–30 / 31–60 / 61–90 / 90+ overdue) is the operational X-ray — collection probability decays sharply with age, so the 90+ bucket is less an asset than a hope; accounting mirrors this with allowances for doubtful debts, writing expected losses before they're certain.
The levers — credit policy as a product decision
AR size is a POLICY outcome, not weather: who gets credit (verification before the first deferred invoice — registers, payment history, limits per customer), on what terms (shorter terms and deposits for new clients; early-payment discounts priced consciously — 2% for 20 days earlier is ~36% annualized, expensive money that still beats a liquidity crisis), how invoicing runs (invoice same-day, correct data, e-delivery — a week of internal lag is a week of free DSO), and how collection escalates (reminder cadence from day one overdue; the discipline chapter lives in our debt-recovery playbook). Financing valve: factoring converts AR to cash at a fee — rational when growth outruns collection, corrosive when it masks a broken credit policy.
When AR kills — reading it with the trilogy
The lethal pattern: profitable P&L, ballooning AR, negative operating cash flow — growth consuming its own fuel (cash flow statement shows it as "subtract receivables growth"; working capital frames the full cycle with inventory and payables). Board-level reading: AR growth persistently faster than revenue growth demands explanation — looser terms bought the growth, a big slow-paying client concentrated the risk, or collections simply slipped. Concentration is its own axis: one customer at 40% of AR is a survival dependency wearing an asset's clothes; cap exposure per client like a lender would — because that is what you are.
FAQ
Are receivables income? They're booked revenue awaiting cash — accrual accounting counts them; your rent, payroll and taxes want cash, which is the entire tension of AR.
What's a good DSO? Relative to terms and industry: B2B services 30–60 typical; retail near zero; the honest benchmark is your own contract terms plus a small tolerance.
Sell the debt or collect it? Factoring/assignment trades margin for speed and works at scale; for single overdue invoices, escalated collection usually recovers more than distressed-sale pricing.
Related: Working Capital · Cash Flow Statement · Payment Terms · Balance Sheet Reviewed: 2026-07-20 · Sources: accounting canon