Accounts Receivable
The total value of invoices customers owe for goods or services already delivered but not yet paid, measured as a balance at a point in time.
◆ Currency
Formula
What it measures
The net amount customers owe you for products or services already delivered, as of the reporting date. It sums every invoice that has been issued but not yet collected, less a reserve for amounts you don't expect to recover. It excludes cash already received, customer prepayments and deposits (those are deferred revenue, a liability), and any future revenue you haven't yet earned or invoiced — AR is strictly what is owed for value already delivered.
Why it matters
AR is where recognized revenue meets actual cash. You read it to see how much of what you've already earned is still sitting uncollected, and how fast that gap is closing. A subscription business with clean billing should carry low AR relative to revenue — contracts bill cyclically and auto-renew — so a rising balance is an early warning of billing failures, payment disputes, or customers in distress. Investors scrutinize AR trends to test revenue quality and to forecast the cash that revenue will actually convert into, because a company can be growing on paper while starving for cash if its receivables balloon.
How to read it
Never read AR as a raw number — always scale it against revenue. The standard lens is Days Sales Outstanding (DSO = AR ÷ (annual revenue ÷ 365)): a DSO of 30 means customers pay roughly a month after invoice. Track DSO and the AR-to-revenue ratio as a trend, not a snapshot. Rising DSO month over month, or AR growing faster than revenue, both mean collections are slowing — a red flag for cash. Also watch concentration: if your top few customers make up most of the balance, one dispute or delay can squeeze cash hard, so a low total AR can still hide real risk.
What good looks like
Good
AR grows slower than revenue and DSO is stable or falling (roughly 30-45 days for recurring SaaS, 45-60 for project or services models), with the bad-debt allowance under ~3% of gross AR.
Watch
AR grows as fast as or faster than revenue, DSO creeps up month over month, the reserve trends higher, or the top few customers make up a large share of the balance.
Bad
DSO rising sharply while AR concentrates in aged or disputed invoices — collections are stalling and a growing share of recognized revenue may never convert to cash.
Watch-outs
- Counting prepayments or deposits as AR. Customer upfront payments are deferred revenue (a liability), not a receivable. AR only includes amounts owed after you've delivered and invoiced — fold prepayments in and you overstate both AR and how much cash is still coming.
- Reporting gross AR and ignoring bad debt. Not every invoice gets paid. Set aside a reserve (often 2-5% of gross AR for SaaS) and report net AR to your board and lenders — quoting gross AR overstates collectible cash.
- Confusing AR with accrued (unbilled) revenue. Accrued revenue is value you've delivered but not yet invoiced; AR is the invoice already issued and outstanding. A partly fulfilled order is accrued revenue until you send the invoice — only then does it become AR.
- Reading AR without scaling it. A $500K balance looks alarming on $1M of revenue and routine on $20M. Always convert to DSO or AR-as-a-percent-of-revenue before you call a trend healthy or broken.
Worked example
Hypothetical
You close Q2 with $500K of recognized revenue. Of that, $300K was collected immediately in cash, $120K is invoiced and due in 30 days, and $80K came from annual subscriptions customers prepaid upfront. Only the $120K of invoiced-but-unpaid amounts is AR — the $300K is already cash, and the $80K prepayment is deferred revenue, a liability. With a $5K bad-debt allowance against the invoiced balance, net AR at quarter-end is $115K.