Accounts Receivable

The mechanic

When a company delivers goods or completes a service and invoices the customer, revenue is recognized on the income statement and accounts receivable is created on the balance sheet — even though no cash has changed hands. When the customer pays, cash flow goes up and accounts receivable goes down.

If a customer fails to pay, the company eventually writes off the receivable through an "allowance for doubtful accounts," which reduces both AR and net income. Companies estimate this allowance based on historical collection rates and customer-specific risk.

Days sales outstanding

The headline AR metric is days sales outstanding (DSO):

DSO = (Accounts Receivable / Revenue) × 365

A DSO of 30 means it takes 30 days on average to collect after a sale. Rising DSO is often an early warning sign — customers paying slower can indicate either internal collection issues or financial stress in the customer base. Public companies disclose DSO trends in their MD&A; analysts watch them closely.

Cash conversion cycle

Accounts receivable, accounts payable, and inventory together form the cash conversion cycle: how many days of cash a business has tied up in operations.

CCC = Days Inventory + DSO − DPO

Lower is better. Software companies (no inventory, fast payment) often run negative CCCs — they collect from customers before paying suppliers, effectively financing growth from float. Capital-intensive businesses run high CCCs and need more working capital.

Receivables financing

Companies short on cash can sell their AR for an immediate discount via factoring or supply-chain finance. Specialized fintechs and banks buy invoices from approved suppliers, advance most of the face value upfront, and collect from the original buyer. The trade-off is the discount cost vs. the cash-flow timing benefit. For fast-growing businesses with long payment terms from large customers, factoring is sometimes the difference between making payroll and not.