Is Accounts Receivable a Current Asset?

Written by Peter Keszegh

It’s important for any business to make sure they’re financially healthy and can pay for everything they need. Maybe you’ve done some research on managing business assets and how these can be converted to the cash you need. If you deal with credit sales, you might’ve heard of the term accounts receivable.

This might have left you with a few questions – what exactly is accounts receivable? Is accounts receivable a current asset? Why is accounts receivable important to my business?

In this article, we’ll discuss everything you need to know about accounts receivable and why managing this will be significant for your business.

Is Accounts Receivable a Current Asset?: Hands Holding US Dollar Bills

Understanding the basics of business assets

First, let’s talk about what business assets are. In simple and loose terms, assets refer to valuable resources owned by a company which are projected to drive financial growth.

There are two main kinds of assets:

  • Current assets: These are short-term assets which are expected to be converted into cash within a year. Examples of current assets include cash itself, inventory, and accounts receivable.
  • Non-current assets: These are long-term assets that contribute to a company's value, such as property, equipment, and patents. These assets provide the company with sustained benefits over several years.

It’s important to manage business assets effectively to make sure your business stays liquid, that your operations are stable, and that you’re poised for long-term growth. Understanding business assets will also give you a clearer idea of your company’s financial health and overall operational efficiency.

Is Accounts Receivable a Current Asset?: Photograph of Person Holding Black Leather Wallet with Money

What are accounts receivable?

In simple terms, accounts receivable refers to the money owed to a business for goods or services that have already been delivered but haven’t been paid for. For instance, if you go out with friends for drinks and you pay the bill for the night, the money your friends owe you is what businesses call “accounts receivable.”

These transactions are recorded at the time of the sale, but payments are deferred and are typically expected to be settled within a year.

It’s crucial for companies to manage their accounts receivable efficiently, to record these pending payments meticulously, and to make sure they collect these payments on time. 

Companies who manage to do so enjoy healthier cash flows, which means they have enough money to cover the needs of their regular operations.

Is Accounts Receivable a Current Asset?: Hands Holding a 10 Dollar Bill

Is accounts receivable a current asset?

Short answer: Yes, accounts receivable is considered a current asset.

Accounts receivable are typically settled within a year. As defined earlier in this article, current assets are expected to be converted into cash within a year – which means accounts receivable falls right into this category.

Current assets are crucial for keeping your business running smoothly. You’ll need cash to make sure your day-to-day operations keep running, to make necessary purchases, and to pay your employees – which means it’s important for you to ensure your accounts receivable are settled at the right time.

But not all accounts receivable are made equal. Some customers will pay you back faster than others, which is why it’s important to keep a close eye on these accounts receivable, so you can properly plan your future expenses and investments.

Accounts receivable plays a key role in your business’ financial health – it’s proof that you’ve secured sales that you’ll soon be adding to your cash flow, and it’ll help you manage your operations and future plans more wisely.

Is Accounts Receivable a Current Asset?: A Person Counting Us Dollars

Why is accounts receivable significant for businesses?

Accounts receivable affects many aspects of a business’ operations. Here are some of the reasons why effective accounts receivable management is important for any business:

Building customer trust and relationships

Accounts receivable represent sales made on credit. This system of trust, which allows customers to pay later, can significantly strengthen business relationships. It shows that you’re confident in your customers’ ability to pay you back, which may foster a sense of loyalty and long-term engagement.

Improving cash flow management

Managing your accounts receivable efficiently leads to an overall steady cash flow. When you make sure your payments are received on time, you also make sure that your business can pay for your operational needs without any interruptions.

Mitigating financial risks

Giving your customers the option to defer payments can boost sales, but you also have to deal with the risk of late payments. If you take a proactive approach in ensuring payments are settled on time, you’ll be able to successfully avoid these financial risks.

Effective accounts receivable management involves assessing how reliable your customers are, setting clear payment terms, and following up on overdue payments.

Supporting strategic financial planning

When you analyze patterns in payment timings and customer behavior, you’ll be able to make better forecasts for your business’ cash flow. Accounts receivable management can help you make informed, data-driven decisions when it comes to financial planning for future expenses and investments.

Managing your accounts receivable is an integral part of ensuring not just the financial health of your business, but also your overall business growth.

Is Accounts Receivable a Current Asset?: A Person Holding Black Desk Calculator

How to manage accounts receivable effectively

How do you know if you’re taking the right steps in managing your accounts receivable correctly and effectively? Here are some concrete ways you can work on better accounts receivable management:

Establish clear credit policies

Before you even make any sales, it’s important to set clear credit policies and to get them in writing. Make sure you outline who’s eligible for credit, what your payment terms are, and what to do if payments are late. A transparent credit policy will properly set expectations and help prevent any misunderstandings.

Use technology

Technology and digital tools can make your accounts management more efficient and can save you some time. You can choose to invest in automated invoicing systems so invoices are sent promptly, or in digital payment platforms that make it easier for your customers to settle their bills.

Monitor accounts receivable closely

Make sure to regularly review your accounts receivable to identify any overdue payments, and follow up as necessary. Keeping a close eye on your accounts receivable will also help you identify payment patterns that will allow you to plan your financial strategies better.

Foster good relationships with customers

Building relationships with your customers will lead to better and clearer communication when it comes to payments. If you have good relationships with your customers, they’ll also be more likely to settle their payments on time, and if any issues arise, you’ll be able to effectively solve these together.

Offer incentives for early payment

One way to motivate your customers to settle their payments earlier is to give them incentives whenever they do so. For instance, you can prioritize the orders of customers who consistently settle their payments promptly.

Alternatively, you can impose penalties for late payments to discourage customers from settling their payments past their due dates.

Is Accounts Receivable a Current Asset?: Men Sitting at the Table

Challenges in accounts receivable management

Of course, managing your business’ accounts receivable is not without its challenges. Here’s a rundown of the common challenges related to managing accounts receivable, and what you can do to avoid these:

Delays in payment

First things first, it’s likely you’ll be dealing with late payments if you offer deferred payments. Late payments will make it more difficult to manage your own expenses and can strain your business’ cash flow.

To avoid payment delays, set up strict credit policies and follow up with your customers persistently. You can automate reminders and personalized follow-ups to encourage your customers to pay on time.

Inaccurate invoices

It’s natural to make a mistake here and there when you send customers invoices. You might send an invoice with inaccurate amounts or missing information.

You can avoid inaccurate invoices by investing in invoicing software that can automate invoices. Make sure to double check your invoices and that all the information is complete and accurate before sending them out.

Managing customer relationships

You want to strike a balance between maintaining good relationships with your customers and enforcing payment terms. You don’t want to risk turning customers away because you followed up with them incessantly.

You can avoid issues like these by establishing clear payment terms from the get-go, so it’s less likely that you’ll run into misunderstandings. Be willing to work with customers in genuine distress, and consider offering special payment plans for customers that run into emergencies.

Keeping track of receivables

When your business grows, you’ll be having to deal with more accounts receivable, which can get tricky as things get more complicated.

If your business gets so big that you’re no longer able to manually manage your accounts receivable, you can invest in accounts receivable management software that can help you monitor outstanding invoices and send automated reminders.

Complying with legal requirements

Payment collection practices are regulated by law, which means failing to comply with these requirements can lead to legal issues. These can be costly and can significantly damage your reputation.

Make sure to stay updated with relevant laws and regulations about debt collection. You can also consult a legal expert who can check if your collection practices are up to standard.

Steer clear of these common challenges, and you’ll be able to ensure your business stays stable and financially healthy.

Is Accounts Receivable a Current Asset?: Round Silver and Gold Coins

Using accounts receivable for business growth

We’ve talked about how efficient accounts receivable management can keep your business financially healthy, but how do you make the most out of this to guarantee that your business grows?

Here’s how you can work towards business growth via strategic accounts receivable management:

Improve cash flow for reinvestment

Ensuring timely payment collections means you have a steady stream of cash coming into your business. This cash flow is crucial for reinvestments, whether you decide to invest in marketing efforts, new product development, or business expansion.

Essentially, the quicker you can convert sales into cash, the more resources you have available for investing in your business growth.

Use data for better decision-making

When you manage your accounts receivable effectively, you’ll get a better understanding of the behaviors of your customers and your business’ financial health. 

Analyze trends in payment times and customer purchases, and use these insights to identify opportunities for upselling, cross-selling, or expanding your market reach.

Strengthen customer relationships

Good accounts receivable management is more than just making sure you get paid on time, it’s also about building positive relationships with your customers. If you communicate with customers openly and offer flexible payment options, you can boost customer satisfaction and loyalty.

You can offer incentives for early payments or negotiate payment plans that benefit your business and your customers. Remember – happy customers are more likely to be repeat customers!

Improve your company's valuation

Efficient accounts receivable management can positively improve your company’s valuation. This means investors and lenders are more likely to think well of your business, as they favor businesses that maintain healthy financial practices.

Make sure to maintain transparent and accurate financial records, and highlight your effective accounts receivable management as proof of your business’ financial stability when seeking investments or loans.

Is Accounts Receivable a Current Asset?: Stocks

Tools for improved accounts receivable management

If you have the resources and funds for it, you might want to consider investing in tools that will help make managing your accounts receivable much easier. Automating certain processes can reduce time and labor involved in manual invoicing and follow-ups, and will minimize errors from manual data entry.

Here are some tools you might want to consider using for your business:

  • QuickBooks: This tool is known for its comprehensive accounting solutions, and is especially helpful for managing invoices, tracking payments, and analyzing accounts receivable data.
  • FreshBooks: This tool is ideal for small businesses and freelancers, as it focuses on making invoicing and following up on late payments simple and efficient. FreshBooks also allows you to set up automated reminders and online payment options.
  • Xero: This tool uses cloud-based accounting software that provides real-time insights on your financial health, including accounts receivable. This allows for easy tracking and management of invoices and payments.
Is Accounts Receivable a Current Asset?: Black Payment Terminal

Takeaways: Is accounts receivable a current asset?

Understanding what accounts receivable is and how to effectively manage it isn’t just important for your business’ financial stability, it’s also crucial in ensuring the growth of your business down the line.

If your friends or business contacts approach you with the same questions you had before reading this guide (E.g. “Is accounts receivable a current asset?”, “Why is accounts receivable important to my business?”), let them know why proper asset management can make all the difference in the success of their business.

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