Accounts receivable

Money owed to the business by customers who have been invoiced and have not yet paid. Also called trade debtors.

Example

Northgate's receivables rose from 560,000 to 790,000, an increase of 230,000 that absorbed exactly that much cash.

Important

An increase in receivables is revenue you have earned and not received. It is the single most common reason a profitable business runs short of money.

Related terms

• Working capital — The money tied up in ordinary trading. The operating version - receivables plus inventory minus payables - excludes cash and borrowings, and is the one that behaves like a use of money.
• Days sales outstanding — How long customers take to pay, on average - receivables divided by revenue, times 365.
• Operating cash flow — The cash a business generated or consumed by running itself, usually presented as net profit adjusted for non-cash charges and for the movements in receivables, inventory and payables.

Lessons that explain it

• A growing company can run out of cash while its revenue rises — How customers pay and how quickly they pay changes cash needs. Diligence checks billing terms, receivables and working capital, not only revenue and profit. (10 min)
• The balance sheet: what it owns and what it owes — A photograph taken on one specific day, showing what the business has, who has a claim on it, and what is left over for the owners. It is the statement that tells you whether a bad year is survivable. (13 min)
• Working capital: the cash growth eats — Between selling something and being paid for it, a business funds the gap out of its own pocket. Working capital is the size of that gap, and it is why growing companies run out of money. (11 min)
• When the cash and the profit disagree, believe the cash — Most accounting problems show up as a widening gap between reported profit and cash collected. A few ratios, tracked over time, catch the common ones. (12 min)

All 578 terms in the Investing glossary