What is accounts receivable? How it works and why it’s important

Getting paid on time is a struggle for many businesses. Late payments disrupt cash flow, create unnecessary stress, and slow down growth. Yet, 77% of finance leaders say their accounts receivable (AR) processes are outdated, leading to inefficiencies and resource-heavy manual work.¹

If you’re managing invoices, tracking payments, and chasing outstanding balances, you know how time-consuming AR can be. Without the right system in place, payment delays pile up, cash flow becomes unpredictable, and financial reporting gets harder.

This guide breaks down everything you need to know about AR, what it is, how it works, and why improving your process is critical to your business’ financial health. You’ll learn how to reduce manual work, speed up payments, and integrate AR with your existing systems so you can focus less on collections and more on growth.

Key takeaways:

• Accounts receivable (AR) represents the money owed to your business for goods and services you’ve delivered, but haven’t yet been paid for. Managing AR requires a comprehensive process to ensure your business can control its cash flow to maintain liquidity.

• Automate steps like invoicing, payment collection, and cash application to reduce manual work, minimise errors, and speed up your AR cycle.

• Offering flexible payment methods (such as credit cards, bank transfers, and mobile wallets) not only enhances customer satisfaction but also accelerates payment processing. Supporting local currencies for global clients and integrating with your accounting software keeps everything running smoothly.

What is accounts receivable?

Accounts receivable (AR) represents the money owed to your business for goods or services already delivered but not yet paid for. It’s recorded as a current asset on your balance sheet and drives cash flow, ensuring your business maintains liquidity and financial stability.

Simply put, AR is the bridge between sales and cash in-hand. Managing it effectively means keeping track of unpaid invoices while ensuring your business has the funds to cover expenses, pay suppliers, and reinvest in growth.

The difference between accounts receivable vs accounts payable

Accounts receivable (AR) and accounts payable (AP) are two essential components of your business’ financial ecosystem, yet they serve opposite functions. AR represents money owed to your business for goods or services delivered, while AP refers to money your business owes to suppliers or vendors.

From an accounting standpoint, AR is a current asset, reflecting incoming cash expected within a set period (typically within a year, depending on credit terms). AP is a current liability, representing outgoing payments your business must make to creditors.

AR is about collecting payments, while AP is about settling obligations. Both are vital to maintaining a healthy cash flow, but each requires a distinct management approach to ensure financial stability.

Why is accounts receivable important?

A strong accounts receivable (AR) process ensures steady cash flow, maintains liquidity, and supports informed decision-making, linking customer value to operational funding. Let’s break down why AR is essential:

Accounts receivable helps maintain liquidity and cash flow

A well-managed AR process ensures a steady inflow of cash, helping you cover daily expenses, pay suppliers on time, and reinvest in your business. Without it, cash flow gaps can disrupt operations and strain relationships with your stakeholders.

AR also gives you visibility over short-term assets, allowing you to acquire stock or infrastructure with minimal risk. These liquid assets are critical for maintaining operational flexibility and seizing growth opportunities.

Accounts receivable measures financial health

AR provides critical insights into your business’ financial stability. Metrics like the receivables turnover ratio show how efficiently your business collects payments. A high ratio indicates strong cash flow management and timely collections, while a low ratio may signal inefficiencies or customer payment issues. These metrics are invaluable for benchmarking performance and identifying areas for improvement.

Accounts receivable strengthens customer relationships

Good AR management builds trust and transparency. Clear invoicing, flexible payment terms, and proactive communication enhances the customer experience, encouraging timely payments and long-term loyalty.

The more efficiently your business manages AR, the stronger its reputation becomes. Consistent collections and reliable cash flow management signal financial stability, building trust with customers, suppliers, and partners.

Accounts receivable enables informed decision-making

AR data reveals customer payment behaviours, credit risk, and cash flow trends. By analysing this data, you can refine credit policies, set realistic payment terms, and identify potential cash flow bottlenecks. This strategic approach minimises risk and supports sustainable growth.

Accounts receivable supports effective compliance and reporting

Accurate AR records are essential for financial reporting and regulatory compliance. They ensure that your business meets accounting standards and tax requirements, reducing the risk of penalties or audits. Well-maintained AR records also provide transparency to stakeholders, including investors, lenders, and auditors.

Prioritising AR management strengthens your financial foundation, reduces risk, and creates new growth opportunities.

Industry examples of accounts receivable management

Effective accounts receivable management maintains liquidity, reduces payment delays, and supports growth, no matter the industry. Below are examples of how different industries can apply AR to manage payments and maintain cash flow:

An example of an accounts receivable process

How does the accounts receivable process work? From issuing invoices to recording payments, each step plays a role in maintaining financial health. This infographic breaks down the AR process into simple steps while highlighting key players.

Pros & cons of accounts receivables

While accounts receivable provides your business with working capital, it also comes with risks that can impact cash flow and financial stability. Let’s break down the key advantages and disadvantages of accounts receivables.

Pros of accounts receivable

• Reliable current asset: AR is a current asset, meaning payments are due within a year or less. This makes it a reliable source of short-term funds for covering day-to-day operational expenses.

• Accessible working capital: As a liquid asset, AR provides quick access to cash once you receive your invoice payments. It makes up part of your business’s working capital, ensuring you have the funds to keep operations running smoothly.

• Collateral for financing: AR can be used as collateral for loans, helping businesses secure short-term financing to meet immediate obligations or invest in growth opportunities.

• Supports cash flow management: Effective AR management can improve your cash conversion cycle (CCC), a key metric for assessing operational efficiency. According to a PYMTNTS study, 91% of mid-sized businesses reported greater savings, cash flow, and growth with fully automated AR systems.²

• Strengthens customer relationships: Offering AR credit terms can build customer trust and loyalty, especially in B2B transactions. For example, a construction company that offers flexible payment terms may secure larger contracts and repeat business from clients.

Cons of accounts receivable

• Risk of non-payment: The biggest drawback of AR is the payment uncertainty. Despite legal obligations, customers may delay or default on payments, leaving your business with unpaid invoices.

• Cost of collections: Pursuing overdue payments can be costly, especially for smaller amounts. Legal fees, administrative costs, and resource allocation may outweigh the benefits of recovering the debt.

• Bad debt: In some cases, unpaid AR may need to be written off as bad debt, directly impacting your bottom line.

• Cash flow disruptions: Late or missed payments can create cash flow gaps, making it difficult to cover operational costs, pay suppliers, or invest in growth initiatives. A Xero research note indicated that a single day’s delay in payment increases an SME’s borrowing needs by 1.1% per quarter.³

• Administrative burden: Managing AR requires significant time and resources, from issuing invoices to tracking payments and following up on overdue accounts.

• Impact on financial ratios: High levels of AR can skew financial ratios, such as ‌current or quick ratios,‌ affecting your business’s creditworthiness. A company with a high AR balance might appear less liquid to lenders, even if the amounts are eventually collected.

Offering familiar and intuitive payment experiences, automating invoicing and reminders, and conducting thorough credit checks can help mitigate the challenges of AR management.

What to understand before building an accounts receivable process

Before setting up an accounts receivable (AR) process, you'll need to grasp a few key concepts. These basics lay the groundwork for an efficient, scalable system that supports your business’s financial objectives and operational requirements.

Does accounts receivable count as revenue?

Accounts receivable refers to money owed to your business, but it’s not the same as revenue. In accrual accounting, revenue is recorded when goods or services are delivered, even if the customer hasn’t paid yet. When you send an invoice, it becomes an account receivable, appearing as an asset on your balance sheet.

For example, if Keith’s Furniture Inc. receives an invoice for US$500 for a service you provided, that invoice becomes a receivable until the customer pays it.

What is an accounts receivable aging schedule?

Managing multiple customer accounts can get tricky, especially with overdue payments. An accounts receivable aging schedule simplifies this by organising unpaid invoices based on how long they’ve been overdue. It sorts your accounts receivable into time periods, like 30, 60, or 90 days overdue, making it easier to spot problem accounts and act quickly.

Here's an example of an accounts receivable aging schedule. This table categorises the outstanding invoices based on how long they've been overdue, helping the company easily identify overdue accounts and prioritise follow-up actions.

In this example:

• ABC Corp. has no overdue payments, so its total accounts receivable falls in the 0–30 days category

• XYZ Ltd. has overdue payments in the 31–60 days range and should be prioritised for follow-up.

• Acme Enterprises has overdue amounts in both the 61–90 days and 90+ days categories, requiring immediate action.

• Luxe Design and Creative Co. have overdue payments at varying levels, which can guide the next steps for collections.

What is the “allowance for uncollectible accounts” account?

When managing accounts receivable (AR), it’s common for some clients to pay late or not at all. To prepare for these potential losses, businesses create an “allowance for uncollectible accounts”. This allowance acts as a buffer for estimated bad debts, ensuring that the AR balance on financial statements is more accurate. By adjusting expectations, the allowance prevents overestimating cash flow and avoids creating misleading reports.

What is the accounts receivable turnover ratio?

The accounts receivable turnover ratio measures how quickly a business collects its outstanding invoices, showing how efficient your AR process is. To calculate it, divide your net sales by the average AR balance for a specific period.

AR turnover = Net credit sales / average AR balance for period

A high ratio means your business collects payments quickly. If your turnover ratio is low, it may be time to adjust credit terms, automate invoicing, or introduce payment incentives to speed up collections.

How to build an accounts receivable process

Having an efficient accounts receivable (AR) process keeps cash flow steady and manages customer payments. A good AR process includes five main steps:

1. Set clear credit terms

Before extending credit, define who qualifies and under what conditions. Reviewing customer credit history, usage patterns, and risk levels helps prevent late payments. Clearly communicate:

• Payment due dates

• Interest or penalties for late payments

• Early payment discounts

2. Invoice accurately and on time

Sending accurate invoices on time helps you get paid promptly. You can send invoices manually or electronically, but automating the process with accounts receivable software is much more efficient. Automated invoicing speeds up delivery and increases the chances of getting paid on time.

3. Offer multiple payment options

Customers can pay through different methods like wire transfers, ACH payments, or paper cheques. Offer fast and intuitive payment options, including diverse payment methods such as credit cards, bank transfers, and digital wallets. It’s also helpful to allow customers to pay in their preferred currency to remove any friction. Look for modern platforms that streamline global payments to speed up your AR process.

4. Apply payments efficiently

When you receive a payment, it’s important to apply it correctly to the customer’s outstanding balance. This process can be time-consuming, especially with a high number of transactions. Automating cash application saves time, reduces errors, and ensures payments are recorded accurately and invoices are marked as paid quickly.

5. Manage collections proactively

If you don't receive your payment by the agreed-upon date, the account is considered delinquent and may require escalation to collections. At this stage, your team will contact the customer to arrange payment. Effectively managing the collections process supports healthier cash flow while minimising bad debt risk.

Streamline accounts receivable with Airwallex

A strong accounts receivable (AR) process keeps cash flow steady and operations running smoothly. But manual invoicing, payment tracking, and collections slow businesses down. Airwallex automates AR from start to finish, reducing errors, improving efficiency, and ensuring faster payments.

Get paid faster: Accept payments in 130+ currencies via 160+ local payment methods

Speed up your AR process and reduce late payments by offering fast and intuitive ways to pay for customers. Airwallex lets you accept payments in 130+ currencies in 180+ countries, via major card schemes and 160+ local payment methods, including electronic funds transfers (e.g. ACH), digital wallets (e.g. Apple Pay), and BNPL options (e.g. Klarna). You can receive these payments directly in your multi-currency Wallet, and use the same funds later to pay global suppliers.

Reduce late payments

Payment Links offer a simple, secure, and direct way for customers to pay their invoices. By embedding a payment link in an invoice, customers can pay immediately, reducing the time it takes to collect payments.

Integrate payments with your accounting platform for better visibility

Airwallex automates invoicing and integrates with small business accounting software platforms like Xero, ensuring accurate, up-to-date financial records. With real-time payment tracking, you can monitor outstanding invoices, take proactive action on overdue accounts, and reduce manual follow-ups.

Payment Links can also be embedded into invoices created through your accounting software, speeding up your collections. With Airwallex’s Xero Invoice Payments integration, customers can pay invoices instantly using their preferred method, including credit cards, Apple Pay, and Google Pay. This reduces reliance on manual bank transfers, speeds up collections, and improves cash flow. Payments are automatically reconciled within your accounting platform, eliminating manual tracking and ensuring a well-functioning AR process.

Get valuable insights with powerful analytics tools

Track payment trends, identify potential bottlenecks, and highlight areas for improvement. Airwallex’s reporting suite provides detailed payment activity exports, settlement reports, and fee breakdowns, offering full transparency over transactions. You can also access real-time balance activity and transaction reconciliation reports, making it easier to track incoming payments, manage cash flow, and optimise your AR process. This data helps you make informed decisions and prioritise collection efforts where they’re needed most.

Managing accounts receivable shouldn’t drain your time. Airwallex automates invoicing, payments, and reconciliation, helping you get paid faster and keep cash flow steady.

With end-to-end financial capabilities – including payment acceptance, multi-currency wallets, spend management, and FX and transfers – Airwallex simplifies every step of your AR process. Instead of chasing invoices, you can spend more time growing your business, building customer relationships, and seizing new opportunities, all while your AR operations run smoothly in the background.

Sources

¹https://www.cfo.com/news/77-of-accounts-receivable-teams-are-not-up-to-date/687947/

² https://www.pymnts.com/study/accounts-payable-receivable-trends-automation-payments-innovation/

³ https://www.xero.com/content/dam/xero/pdfs/xsbi/research-note-late-payments-and-small-business-borrowing.pdf