Accounts receivable: definition, process and cash flow

Published Thursday 2 April 2026

Table of contents

• What is accounts receivable?
• How accounts receivable works
• The role of accounts receivable in your business
• Is accounts receivable an asset?
• Accounts receivable vs accounts payable
• What is aging of accounts receivable?
• What does an aging report do?
• Can you sell your invoices?
• What is accounts receivable financing?
• What is a bad debt?
• When should you write off a bad debt?
• How to manage accounts receivable effectively
• Manage your accounts receivable with confidence using Xero
• FAQs on accounts receivable

Key takeaways

• Implement a systematic accounts receivable process that includes prompt invoicing, regular tracking of payments, and consistent follow-up on overdue invoices to maintain healthy cash flow.
• Monitor your aging report weekly and act quickly on overdue payments, as the longer an invoice remains unpaid, the less likely you are to collect it.
• Set clear payment terms and make payment easy for customers by offering multiple payment methods and including all necessary payment details on every invoice.
• Consider accounts receivable financing to access up to 90% of your invoice value immediately if you need to improve cash flow before customers pay.

What is accounts receivable?

Accounts receivable is the money customers owe your business for goods or services you've provided. Once you send an invoice, that amount becomes part of your accounts receivable until the customer pays.

Accounts receivable refers to both the money owed and the process of collecting it. The accounts receivable (AR) process includes:

• Sending invoices: Billing customers for completed work
• Tracking payments: Monitoring which invoices have been paid
• Following up on payment: Contacting customers about overdue invoices
• Reconciling invoices: Matching payments to the correct invoices

You may also hear accounts receivable called bills receivable or simply invoicing.

How accounts receivable works

Accounts receivable follows a straightforward cycle from sale to payment. Understanding this process helps you spot where things can go wrong.

Here's how the accounts receivable process works:

1. Deliver goods or services: Complete work for your customer
2. Send an invoice: Bill the customer with payment terms and due date
3. Track the invoice: Monitor whether payment arrives on time
4. Collect payment: Follow up on overdue invoices as needed
5. Record the payment: Match the payment to the invoice and update your records

The faster you move through each step, the healthier your cash flow stays.

The role of accounts receivable in your business

Accounts receivable directly affects your cash flow and ability to pay bills, staff, and suppliers. Without a clear AR process, money owed to you can sit uncollected while expenses pile up.

Effective AR management helps you:

• Maintain steady cash flow: Collect payments on time to cover operating costs
• Make informed decisions: See how much money is coming in and when
• Spot problems early: Identify slow-paying customers before debts become uncollectable
• Build customer relationships: Set clear payment expectations from the start

For small businesses, accounts receivable often determines whether you can pay yourself, invest in growth, or simply keep the lights on.

Is accounts receivable an asset?

Yes, accounts receivable is an asset. It represents money your business is owed, which has real value on your balance sheet.

Your invoices are valuable enough that some finance companies will buy them from you. Once a customer pays, that invoice converts from an AR asset into cash in the bank.

If an invoice goes unpaid and you write it off as a bad debt, it's no longer considered an asset.

Accounts receivable vs accounts payable

Accounts receivable and accounts payable are opposite sides of the same transaction. AR is money owed to you, while AP is money you owe others.

Here's the key difference:

• Accounts receivable (AR): Money customers owe your business for goods or services you've provided
• Accounts payable (AP): Money your business owes to suppliers, vendors, or creditors

On your balance sheet, accounts receivable appears as an asset because it's money coming in. Accounts payable appears as a liability because it's money going out.

What is aging of accounts receivable?

Aging of accounts receivable is the process of tracking how long invoices have been overdue. You calculate aging by counting the days since each invoice's due date.

For example, if an invoice was due four days ago, it has an age of four days. The longer an invoice ages, the less likely you are to collect it, which is why some businesses emphasise salespersons' collection responsibility to improve performance.

What does an aging report do?

An aging report lists all your past-due invoices, sorted from least overdue to most overdue. At a glance, you can see which payments you're waiting on and which have been outstanding the longest.

Review your aging report regularly and act quickly. The older an invoice gets, the less likely you are to collect it. Set clear escalation steps:

• Day 1: Send a friendly payment reminder email
• Day 3: Follow up with a phone call
• Day 7: Send a formal overdue notice
• Day 30+: Consider stronger collection measures

Check our guide on how to treat overdue invoices for more tips.

Can you sell your invoices?

Yes, you can sell your invoices to get cash faster, with some financing companies providing funds sometimes within a day. This is called accounts receivable financing, invoice financing, or invoice factoring.

When you sell an invoice, you sign it over to a finance company. They pay you a portion of the invoice value upfront, then collect the full amount from your customer.

Finance companies know that older invoices are harder to collect. So they typically only buy recent invoices, not ones that are already significantly overdue.

What is accounts receivable financing?

Accounts receivable financing lets you access a portion of an invoice's value before your customer pays, with most advances typically between 70% to 90%. It's a way to improve cash flow without waiting for payment.

Here's how it typically works:

• Initial payment: The finance company pays you up to 90% of the invoice value
• Customer pays: Your customer pays the finance company directly
• Final payment: You receive the remaining balance, minus fees

You won't receive the full invoice value because the finance company charges fees for the service, which are often around 2–5% of the invoice's total value. They also won't buy old invoices, so this isn't a solution for existing bad debts.

Speak to your accountant or financial adviser before using invoice financing.

What is a bad debt?

A bad debt is an invoice you're unlikely to collect. When you accept that a customer won't pay, you write off that invoice as a loss.

Writing off bad debts matters for your accounting records. You may have already paid tax on income you never received. By writing off the invoice, you can claim that tax back.

When should you write off a bad debt?

Write off a bad debt when there's no reasonable chance of getting paid. This decision is yours to make based on the circumstances.

Common reasons to write off a debt:

• Customer insolvency: The customer has gone out of business
• Unresolved disputes: You're locked in a disagreement unlikely to be resolved
• No response: The customer ignores all payment reminders

Whether you write off after six months or 18, don't stop trying to collect. Keep sending reminders even after you've written off the debt. If the customer eventually pays, you can declare the income on your next tax return.

How to manage accounts receivable effectively

Effective AR management keeps cash flowing into your business and reduces the risk of bad debts. A clear process helps you get paid faster and spend less time chasing payments.

Follow these steps to manage your accounts receivable:

1. Set clear payment terms: Define due dates and late payment policies before you start work
2. Invoice promptly: Send invoices as soon as you deliver goods or complete services
3. Make payment easy: Offer multiple payment methods and include payment details on every invoice
4. Track aging regularly: Review your aging report weekly to spot overdue invoices early
5. Follow up consistently: Contact customers as soon as payments become overdue
6. Automate where possible: Use accounting software to send reminders and track payments automatically

The right tools make accounts receivable management faster and more reliable. Accounting software like Xero automates invoicing, sends payment reminders, and shows you exactly what's owed at any time.

Manage your accounts receivable with confidence using Xero

Late payments put pressure on every part of your business. When customers don't pay on time, you may struggle to cover suppliers, staff, or your own wages. Poor accounts receivable management is one of the most common reasons small businesses fail.

Xero helps you stay on top of accounts receivable with automated invoicing, payment reminders, and real-time visibility into what's owed. You can see your cash position at a glance and act quickly when payments fall behind.

Take control of your accounts receivable. Get one month free and see how Xero simplifies getting paid.

FAQs on accounts receivable

Here are answers to common questions about accounts receivable.

What is accounts receivable vs accounts payable?

Accounts receivable (AR) is money customers owe you. Accounts payable (AP) is money you owe suppliers. AR is an asset on your balance sheet, while AP is a liability.

Is accounts receivable a debit or credit?

Accounts receivable is a debit on your balance sheet. When a customer pays, you credit the AR account and debit your cash account.

How long should accounts receivable take to collect?

Most businesses set payment terms of 30 days, though this varies by industry. Track your days sales outstanding (DSO) to measure how quickly you're collecting payments on average.

What happens if accounts receivable isn't managed properly?

Poor AR management leads to cash flow problems, increased bad debts, and difficulty paying your own bills. In severe cases, it can cause business failure.

Can you automate your accounts receivable process?

Yes. Accounting software like Xero automates invoicing, sends payment reminders, matches payments to invoices, and generates aging reports automatically.