Accounts Receivable

At Towerstone Accountants we provide specialist small business accountancy services for owners, directors, and growing businesses across the UK. We created this webpage for small business owners and managers who want clear explanations of accounting terms, processes, and concepts they may encounter when running a business. Our aim is to make financial language easier to understand, and help you make better informed decisions with confidence.

Accounts receivable is one of those accounting terms that sounds technical but sits right at the heart of everyday business reality. If you invoice customers and wait to be paid you already deal with accounts receivable whether you call it that or not. In my experience it is one of the most important areas for cash flow and also one of the most poorly understood by small and growing businesses.

Many business owners focus on sales turnover and profitability while assuming that money owed to them will eventually arrive. That assumption is where problems start. Accounts receivable is not just an accounting label. It represents real money that you have earned but do not yet have in the bank. How well you manage it often determines whether your business feels stable or constantly stretched.

In this article I want to explain accounts receivable in clear practical UK focused terms. I will cover what it is how it works why it matters how it appears in your accounts common mistakes I see and how to manage it properly. Everything here is based on real UK business practice and situations I deal with regularly.

What accounts receivable actually means

Accounts receivable refers to money owed to your business by customers for goods or services you have already provided but have not yet been paid for. It sits on your balance sheet as a current asset.

In simple terms:

• You do the work or deliver the goods

• You issue an invoice

• The customer has not paid yet

• The outstanding amount is accounts receivable

Until payment is received the invoice value remains in accounts receivable.

This is different from future sales or estimates. Accounts receivable only includes amounts that have already been invoiced or are contractually due.

Why accounts receivable matters so much

Accounts receivable matters because profit does not pay bills cash does. A business can show healthy profits on paper and still struggle if customers pay late or not at all.

In my experience many cash flow problems are not caused by low sales but by poor control over receivables.

High accounts receivable balances can indicate:

• Slow paying customers

• Weak invoicing processes

• Poor credit control

• Overly generous payment terms

None of these are fatal on their own but left unmanaged they create ongoing pressure.

Where accounts receivable appears in your accounts

Accounts receivable appears on the balance sheet under current assets. It represents money expected to be received within the next twelve months.

It is closely linked to the profit and loss account but they are not the same thing.

Here is the key distinction:

• Profit and loss shows income earned

• Accounts receivable shows income not yet collected

This difference explains why profit and cash do not always match.

For example you may invoice £50,000 in a month which appears as income but if only £30,000 is paid the remaining £20,000 sits in accounts receivable.

Accounts receivable for sole traders versus limited companies

The concept of accounts receivable applies to all businesses regardless of structure.

For sole traders accounts receivable still exists even though there is no legal separation between owner and business. Outstanding invoices are still money owed to the business.

For limited companies accounts receivable belongs to the company not the director personally. This distinction matters for reporting and sometimes for lending.

The underlying principle is the same. Money invoiced but not received is accounts receivable.

How accounts receivable builds up

Accounts receivable grows when invoices are issued and reduces when payments are received.

The basic movement looks like this:

• Invoice issued increases accounts receivable

• Payment received reduces accounts receivable

If invoices are issued faster than payments are received the balance increases.

A steadily increasing accounts receivable balance can be a warning sign especially if sales are not growing at the same rate.

The accounts receivable formula

At a basic level accounts receivable follows a simple formula:

Closing accounts receivable = Opening accounts receivable + Invoices raised − Payments received

This formula helps explain changes in the balance from one period to the next.

If you understand this relationship it becomes much easier to identify where issues are arising.

Trade debtors and accounts receivable

You may also hear accounts receivable referred to as trade debtors. In UK accounting these terms are often used interchangeably.

Trade debtors specifically refers to amounts owed by customers from trading activities.

Some businesses also have non trade receivables such as:

• VAT refunds due

• Staff loans

• Other short term balances

When analysing customer payments it is trade debtors that matter most.

How accounts receivable affects cash flow

Accounts receivable directly affects cash flow because it represents cash that has not yet arrived.

A business with high receivables may struggle to:

• Pay suppliers on time

• Meet payroll

• Pay tax bills

• Invest in growth

This often leads to short term borrowing even when the business is profitable.

I regularly see businesses using overdrafts while sitting on large unpaid invoices.

The difference between good and bad accounts receivable

Not all accounts receivable is a problem. Some level of receivables is normal and expected especially in business to business environments.

The issue is not the existence of receivables but their age and collectability.

Good accounts receivable is:

• Within agreed payment terms

• From reliable customers

• Actively monitored

Bad accounts receivable is:

• Overdue by long periods

• Concentrated in a few customers

• Repeatedly rolled forward

The older a receivable becomes the less likely it is to be paid.

Aged accounts receivable analysis

One of the most useful tools for managing receivables is an aged accounts receivable report.

This breaks outstanding invoices into time bands such as:

• Current

• 30 days overdue

• 60 days overdue

• 90 days overdue

This immediately shows where problems are developing.

In my experience businesses that review aged receivables regularly experience far fewer surprises.

Common causes of high accounts receivable

High or growing receivables usually come from a small number of root causes.

These include:

• Invoicing late

• Invoices missing key information

• Long or unclear payment terms

• Customers disputing invoices

• Lack of follow up

Rarely is it because customers are deliberately refusing to pay from the outset.

Fixing the process often fixes the problem.

Invoicing and its impact on accounts receivable

Invoicing quality has a direct impact on receivables.

Invoices should be:

• Issued promptly

• Clear and accurate

• Sent to the correct contact

• Easy to pay

Delays or errors at this stage push payment further into the future.

One of the first things I review when receivables are high is how and when invoices are issued.

Payment terms and accounts receivable

Payment terms shape accounts receivable more than many people realise.

If your standard terms are 30 days you should expect receivables equivalent to roughly one month of sales.

If terms are 60 days receivables will naturally be higher.

Problems arise when customers do not follow the agreed terms or when terms are not enforced.

Clear consistent terms reduce disputes and speed up payment.

Credit control and chasing payments

Credit control is the process of managing and collecting accounts receivable.

Good credit control is structured and unemotional.

It usually involves:

• Regular review of overdue invoices

• Automated reminders

• Clear escalation steps

• Phone follow ups when needed

Leaving chasing too long reduces your leverage.

In my experience the most effective chasers are early and polite rather than aggressive and late.

Bad debts and writing off accounts receivable

Sometimes accounts receivable will not be collected. Customers may go out of business or disputes may never be resolved.

When an amount is genuinely uncollectable it becomes a bad debt.

Writing off a bad debt removes it from accounts receivable and recognises the loss in the profit and loss account.

In the UK bad debts may be allowable for tax purposes provided certain conditions are met.

Holding on to bad debts indefinitely distorts the accounts and hides problems.

Accounts receivable and VAT

VAT adds another layer of complexity to receivables.

When you invoice a customer and are VAT registered you usually owe VAT to HMRC based on the invoice date not the payment date unless you use cash accounting.

This means you may have to pay VAT on money you have not yet received.

High accounts receivable can therefore create VAT cash flow pressure.

This is one reason some businesses choose cash accounting for VAT where appropriate.

Accounts receivable turnover

Accounts receivable turnover is a ratio used to assess how quickly receivables are collected.

It looks at how many times receivables are converted into cash over a period.

A higher turnover generally indicates faster collection.

While ratios can be useful I always caution against relying on them alone. Understanding customer behaviour matters more than hitting a target number.

Days sales outstanding

Days sales outstanding often shortened to DSO measures the average number of days it takes to collect payment.

It is calculated by comparing receivables to average daily sales.

A rising DSO suggests customers are taking longer to pay.

This metric is particularly useful for spotting trends over time.

Accounts receivable and business valuation

Accounts receivable also matters when valuing a business.

Buyers will look closely at:

• The size of receivables

• The age profile

• Concentration risk

• Bad debt history

Poor receivable management can reduce value or complicate a sale.

Clean well controlled receivables increase confidence.

Managing accounts receivable proactively

The best way to manage receivables is to prevent problems rather than react to them.

This involves:

• Clear contracts

• Upfront deposits where possible

• Regular invoicing

• Consistent follow up

Prevention is always easier than recovery.

Technology and accounts receivable

Modern accounting software makes receivable management much easier.

It allows you to:

• Track unpaid invoices

• Send automated reminders

• Produce aged reports

• Match payments automatically

Manual systems make it harder to see problems developing.

In my experience moving to proper software often improves cash flow quickly even without changing customers.

Common mistakes I see with accounts receivable

Some recurring mistakes include:

• Treating receivables as an afterthought

• Chasing only when cash is tight

• Allowing customers to dictate terms

• Mixing personal and business money

• Not reviewing aged reports

These behaviours often develop gradually and become normalised until a crisis hits.

Accounts receivable and growth

As businesses grow accounts receivable naturally grows too.

More customers and higher sales usually mean more outstanding invoices.

Growth therefore increases the importance of good receivable management.

Businesses that do not adapt their systems as they scale often feel constant cash pressure despite success.

When accounts receivable becomes a warning sign

Accounts receivable should raise concern when:

• It grows faster than sales

• Overdue balances increase

• One customer dominates the balance

• Cash flow becomes unpredictable

These signals should trigger review not panic.

Ignoring them rarely ends well.

The role of an accountant in managing receivables

An accountant does not usually chase invoices but they play a key role in designing systems and highlighting issues.

They help by:

• Reviewing aged receivables

• Identifying trends

• Advising on VAT schemes

• Improving reporting

In my experience clients who engage with this information regularly make better decisions.

Accounts receivable versus accounts payable

It is also useful to consider receivables alongside payables.

Receivables bring money in. Payables take money out.

Balancing the timing of both improves cash flow.

Strong businesses manage both sides deliberately.

Why accounts receivable is often underestimated

Accounts receivable is not exciting. It does not feel like strategy or growth. As a result it is often neglected.

Yet poor receivable management can undo the benefits of strong sales and good margins.

In my experience improving receivable control is one of the fastest ways to stabilise a business.

Final thoughts

Accounts receivable represents the gap between earning money and having money. Understanding and managing that gap is essential for any business that invoices customers.

It is not enough to know how much you have sold. You must know how much is owed when it is due and how likely it is to be paid.

When accounts receivable is controlled cash flow improves stress reduces and planning becomes easier. When it is ignored even profitable businesses can struggle.

In my experience the best run businesses are not those with the highest sales but those with clear visibility and discipline around the money they are owed.

Accounts receivable may sit quietly on the balance sheet but its impact is felt every day in the real world of running a business.

You may also find our guidance on account in debit and arrears useful when exploring related accounting topics. For a wider collection of plain English explanations, you can visit our knowledge hub.