Back to Blog
Published at | Updated:

What’s accounts receivable? Everything you need to know

A woman handing a business owner an envelope with a check for services rendered.
Adi Trudler
Published at | Updated:

Starting a business is the most exciting thing an entrepreneur can set their mind to. But there are aspects of running a business that aren’t so glamorous. Think accounting, for example. Yet, it’s a critical, unavoidable part of running a successful business.

Whether you own a coffee shop or you’re an interior designer, it’s good to know accounting basics. It will help you get a better financial understanding, maintain profitability, and be better prepared for tax season.

In this article, we’ll introduce you to the basics of accounts receivable: what it means and how to manage it.

First, what is accounts receivable?

Any payment you expect to receive for goods and services already rendered is considered accounts receivable (AR). Let’s say you’re an electrician and you installed lighting for a big construction project and you still haven’t been paid. That money you are owed is accounts receivable.

Even though AR refers to money that hasn’t been paid yet, it’s listed on the balance sheet as a current asset. Plus, any amount of money owed by customers for purchases made on credit is considered AR.

What’s the difference between accounts payable and accounts receivable?

Accounts receivable and payable are two sides of the same coin. While AR is everything your business is owed, accounts payable (AP) is everything your business owes for goods and services already provided. That includes all your business expenses such as rent, taxes, utility bills, supplies, and vendors.

How does the AR process work?

First things first, your business can’t operate without an AR process. At the end of the day, the ultimate goal is to get paid and start earning money. Different companies have different processes in place, but there are some things that are pretty much universal.

  1. Send invoices or payment requests: To get paid, you must deliver a product or service. Oftentimes, once you sign the deal, you’ll require a down payment. In other cases, you’ll probably send an invoice after you finish the job. Either way, your invoices must include all payment details like due date and payment amount. When accompanied by a signed contract or an order confirmation, an invoice can become a legally binding document.
  2. Collect payment: Your customer now needs to pay you. Many businesses work with cash or paper checks. No matter how you receive payment, you should have an organized and well-thought-out system for collecting.
  3. Reconciliation: When collecting payments, you have to keep track of everything: who paid you, how much, and what invoices still haven’t been paid. This will come in handy come tax season.

The importance of a good AR process

A good, efficient AR process goes hand in hand with healthy finances. One of the best ways to make sure you have such a process in place is by automating it.

Let’s say, for example, you have a farm where you grow vegetables you then sell to restaurants across your state. You make a sale and deliver the produce yourself, provide an invoice, and accept a check. However, one of the checks you received bounced. Not only that, but you forgot to update your books with the correct amount and your customer now says the amount was much lower than what you agreed upon. No matter how much you trust your clients, it’s incredibly important to avoid being put in this position.

There are different tools that allow you to manage all your AR online. Accounting software like QuickBooks can help you keep your books in order. And a tool like Melio makes it easy to keep track of all your invoices and send payment requests online. In addition, it allows you to accept payments via bank transfer–meaning it’s less prone to fraud.

More benefits of a digital AR process

Getting paid faster

When you do the AR process manually, it’s more likely there will be errors, and a lot of back and forth, which can result in discrepancies. This slows you down and means processing payments can take a few weeks. With an automated AR system, payments are processed immediately. Plus, by getting paid by a bank transfer (instead of checks), You get funds much faster.

Saving time

AR automation means the whole process is done very quickly. Instead of guessing where’s a certain payment, you get a notification that a payment is coming. It’s also easier for your customers who can just click on a payment link and pay.

This frees up time for you to focus on other, more interesting aspects of your business.

Generating more sales

Managing your AR process online usually means you are open to accepting online payments—like ACH bank transfers and credit cards.

When you are giving your customers more payment options, you’re opening yourself up to more business. Which means more revenue. Win-win.

Making sure you get paid

An online payment process also helps make sure your customers pay on time. There are many reasons customers don’t pay invoices when they’re due, including lost bills and unexpected expenses that arise.

Using a digital AR tool can help you keep track of invoices that haven’t been paid yet, helps you send reminders, and re-send payment requests. That way, you make sure no one forgets to pay you, and that you always get paid in a timely manner.

Automate your AR process

In this post, we covered some of the basics of accounts receivable—what they are, how important they are for your business’s financial health, and how a good process can benefit you. Now’s the time to take things into your own hands and implement an online AR process that will improve how you collect funds. Plus, guarantee all the money you are owed actually comes in.

*This blog post is intended for informational purposes only and is not intended as financial advice.
**Melio does not provide legal, tax or accounting advice, and you should consult with a professional advisor before making any financial decisions.