Accounts receivable (AR) is money owed to your business by customers who have purchased goods or services on credit. AR is a snapshot of your unpaid invoices and represents the value you have delivered but haven’t been paid for. If you send a client an invoice after completing a project, the amount they owe is considered accounts receivable until they pay the invoice.

Below, we’ll explain why accounts receivable is classified as an asset, what makes accounts receivable a liquid asset, and tips for managing accounts receivable.

What’s in this article?

• Why is accounts receivable classified as an asset?
  
• How does accounts receivable affect a business’s balance sheet?
  
• What makes accounts receivable a liquid asset?
  
• Can accounts receivable become a liability?
  
• Tips for managing accounts receivable
  
• How Stripe can help
  

Why is accounts receivable classified as an asset?

An asset is something your business owns that has economic value—something that can contribute to your financial health now or later. Accounts receivable is an asset because it represents cash that will come into your business.

In accounting terms, AR is recorded as a current asset, which means you expect it to convert into cash within a year. Current assets represent the resources your business has on hand to meet immediate obligations and fund operations. This category also includes cash, inventory, and short-term investments.

How does accounts receivable affect a business’s balance sheet?

Accounts receivable belongs in the current assets section of your balance sheet, usually near the top. It adds to your total assets: when your accounts receivable goes up, so does the value of your business on paper. Conversely, if customers don’t pay, your assets go down.

A balance sheet is a snapshot of what your business owns (assets) and owes (liabilities) at a given moment. A healthy accounts receivable number signals strong sales and customer demand. But if AR grows too large, it can hint at collection issues or overly lenient payment terms. If too much of your asset value is tied up in unpaid invoices rather than direct cash, you might struggle to pay bills or fund growth, even if your balance sheet looks healthy.

What makes accounts receivable a liquid asset?

Liquidity refers to how quickly and easily you can convert an asset into cash. Cash is the most liquid asset—you don’t have to do anything to convert it. Though not quite as liquid as cash, accounts receivable is a liquid asset because it’s expected to turn into cash within a short time. The more liquid your AR, the easier it is for you to maintain cash flow, cover expenses, and reinvest in your business.

The liquidity of AR depends on factors such as:

• Payment terms: Shorter payment windows (e.g., net 30 [days] instead of net 90) mean quicker access to cash.

• Customer reliability: A customer with a strong payment history is more reliable than one with a weak or nonexistent payment history.

• Collection practices: Proactive follow-ups and strong invoicing processes improve your chances of getting paid on time.

Can accounts receivable become a liability?

Though accounts receivable is an asset by definition, it can become a liability in certain circumstances. Here’s how AR can become a problem for businesses:

• Unpaid invoices: If customers don’t pay what they owe, your AR doesn’t turn into cash. Instead, it turns into bad debt, which lowers your profits and assets.

• Cash flow strain: If too much of your revenue is tied up in AR, it can create a cash flow problem. You might struggle to cover operating costs, meet payroll, or take advantage of growth opportunities.

• Collection costs: Chasing overdue payments costs time and money, whether you’re hiring a collections agency or dedicating staff hours to follow-ups.

Tips for managing accounts receivable

Managing accounts receivable well can make a big difference for your business’s liquidity and financial position.

Be strategic with your payment terms

It’s easy to default to the standard net 30 payment terms. But does net 30 fit your needs? If you’re constantly waiting for customers to pay, consider tightening the window. Try net 15 or request up-front payments from certain clients. Explain to customers in straightforward language why shorter terms help you deliver better service.

Make invoices easy to pay

A poorly designed invoice can delay payments. Your invoices should be clear and actionable. Include a breakdown of what is owed, due dates, and payment instructions. Consider using software to embed a “Pay Now” button or QR code. Make it as simple for customers to pay your invoices as it is for them to check out at a store.

Review AR every week

Issues with AR can drag on and escalate if you wait until the end of the month to review. Check your outstanding invoices weekly so you can take immediate action before payment problems spiral.

Build personal relationships with customers

Maintaining friendly relationships with your customers makes it easier to have honest conversations when payments are late. A personal email or call can be more effective than automated reminders alone.

Offer early payment incentives

Instead of sending reminders and hoping customers pay on time, give them a reason to pay early. For example, “Pay within 10 days and get 2% off your next invoice.” Small discounts can save you weeks of waiting and show customers you appreciate their timeliness.

Don’t be afraid to fire high-risk customers

Not every client is worth it. If someone pays late consistently, give yourself permission to cut ties. Protecting your business’s financial health should be your top priority. Trust your instincts when a client’s payment behavior raises red flags.

Use software to make accounting easier

Manual AR tracking can create more errors and waste valuable time. Use accounting or invoicing tools that automatically log payments, send reminders, and flag overdue invoices. Automation doesn’t replace good judgment, but it frees up your time and energy so you can focus on the more important and difficult parts of running your business.

Plan for what won’t get paid

Not all invoices will be paid. Whether your client is going out of business or refusing to pay, there are things you cannot control about the invoice process. Set aside a small percentage of your revenue as a “rainy day” fund to cover these cases so they don’t derail your finances.

How Stripe can help

Stripe offers a range of solutions that can help businesses manage their accounts receivable processes. With Stripe Invoicing, you can send invoices to your customers more quickly with easy invoice generation features and encourage them to pay faster by accepting a variety of payment methods, including bank transfers. Stripe makes it easier for businesses to securely accept bank transfers from customers by providing unique, virtual bank account details for each customer, which keeps the business’s account information confidential.

Stripe’s automation features can also email invoices to customers, execute transactions, and match payments to invoices. This reduces the manual work involved in reconciling and collecting incoming payments.