2025-11-14
What Are Accounts Receivable? A Complete Guide for Businesses
2025-11-14
When you sell a product or service and allow the customer to pay you later, you create an Accounts Receivable (AR), money owed to your business. AR is at the heart of cash flow, forecasting, and financial stability. If you plan on running a predictable operation with less than the standard number of cash crunches, you simply cannot ignore AR.
This guide will explain what AR is, the importance of AR, and how you can manage it more effectively.
Accounts Receivable (AR) is the amount of all invoices a business has issued and not collected. In simple terms, it’s the combined amount customers owe you for goods or services that have been delivered.
AR appears as a current asset on the business balance sheet because you expect to convert it to cash in a short time period-immediate or up to 30, 60, or 90 days.
Examples:
Effective management of accounts receivable can do more than just keep your books organized. It can also protect your cash flow and, ultimately, the health of your business. Many businesses choose to work with an accounting firm in Dubai to ensure their receivables are sufficiently monitored.
Accounts receivable has a direct relationship with how much cash you have available in the bank. When payments are overdue, that cash is frozen, and it can affect your ability to pay bills, pay employees, or buy more inventory or assets.
Creating clear invoices, having reliable terms and conditions for payment, and following up professionally and consistently builds trust and reduces disagreements with customers.
When you track your accounts receivable over time, you will better know when to expect cash from receivables, if a customer has a slow payment history with you, or if it is time to change credit terms for customers.
When a business is evaluated by lenders or investors, they will want to see what its accounts receivable looks like. A good quality of accounts receivable represents less financial risk to the investor or lender and is a good sign that the interest rate or terms they may offer.
Here is the normal flow from start to end:
Formula:
DSO = (Total AR ÷ Total Credit Sales) × Number of Days
The lower the DSO, the healthier your cash flow.
Aging reports organize your invoices by how overdue they are. Most reports will group invoices into 0–30 days, 31–60 days, and 61–90 days. The aging report is helpful for an early indication of financial risk.
The collection effectiveness index tracks how effectively your team is collecting on payments.
The bad debt ratio is how much of your credit sales you never collect. If the bad debt ratio is low, then it simply means your credit policies are sound.
Solution: Automate reminders, provide early bird discounts, obtain buyer credit reports.
Solution: Include a clear item description, provide proof of delivery or service, and consistently comply with documentation requirements.
Solution: Use AR dashboards, aging reports, or reconcile invoices weekly, bi-weekly, or monthly.
Solution: AR process automation tools can fix these errors and expedite billing processes.
Make payment deadlines and penalties, accepted payment vehicles, and delivery guidelines clear from the start.
When you send invoices quickly, you get the payment quicker.
Automation minimizes mistakes and allows you to be consistent on follow-up.
Make it easy for your customers to pay! Credit card, ACH, and direct debit.
Your reviews should be at least once a week; this will help you identify and address issues before they get out of control. Leveraging professional accounting services in Dubai can help businesses streamline collections and maintain a steady cash flow.
If your company is growing quickly, AR automation tools are likely to become more common.
You might think about using it if:
Automation tools are built to manage billing, reminders, reconciliation, disputes, and data analysis without having anyone do the work.
Accounts Receivable is not just words on an accounting term; it is an indication of your business’s financial solvency in real time. When AR is handled properly, cash flows smoothly, your customers trust you, and your business grows, without getting in its own way. When it is neglected, even profitable businesses can run into liquidity issues. Contact The Total CFO now to get these services for your business and grow immensely.
With over 25 years in Dubai and nearly 30 years as a Chartered and Management Accountant, Hemant has extensive experience across manufacturing, services and technology sectors. He has worked with major corporate groups including Al Tayer, Saif Al Ghurair, Dhabi, and Aditya Birla. Hemant specializes in profitability and cost management, debt restructuring, contract management, and regulatory compliance, having generated approximately USD 47.5 million in savings and profit growth. A confident public speaker and Distinguished Communicator, he lives by the quote: “You get what you reward for. If you want ants to come, you put sugar on the floor” (Charlie Munger), embodying his belief that “Profit has its own intelligence.”
With over 25 years in Dubai and nearly 30 years as a Chartered and Management Accountant, Hemant has extensive experience across manufacturing, services and technology sectors. He has worked with major corporate groups including Al Tayer, Saif Al Ghurair, Dhabi, and Aditya Birla. Hemant specializes in profitability and cost management, debt restructuring, contract management, and regulatory compliance, having generated approximately USD 47.5 million in savings and profit growth. A confident public speaker and Distinguished Communicator, he lives by the quote: “You get what you reward for. If you want ants to come, you put sugar on the floor” (Charlie Munger), embodying his belief that “Profit has its own intelligence.”
Archana Mundhra is a qualified Chartered Accountant with over 15 years of experience in multinational corporations. Her proficiency lies in financial planning and business intelligence. Her deep financial understanding and profound analytical skills empower her to assist management in realizing their objectives effectively.
Rinkle Jain is a qualified Chartered Accountant and Fellow Member of the Institute of Chartered Accountant of India. A results-driven Chartered Accountant with a distinguished career marked by proficiency in management, financial planning, and catalyzing overall company development.Demonstrates a unique blend of financial acumen, strategic insight, and leadership prowess, contributing significantly to organizational success.
