A little bit more about AR:
If you recently started a business, you may have heard your accountant talk about accounts receivable (AR) but weren’t sure what it is. It’s important for you as a business owner to understand what it’s all about, which is why we’re here to look at real-life examples of AR.
Christopher is an electrician from Toledo, Ohio, and has been running his own business for over 10 years. In the past two years, he’s been mainly working with contractors on big projects like building electrification and converting apartment buildings into office spaces. When he signs a contract with a contractor, he usually accepts a down payment and the rest is owed by the time the job is completed.
The money he is expecting to receive is his AR. So basically, any payment you are owed for services or products you sold but haven’t yet received falls into this category. Christopher has a lot of expenses–he needs to pay for materials and equipment, for gas and his phone bill, and he needs to pay Mike, his employee. To do so, he needs to constantly be on top of his AR and know exactly what he is owed and when.
Let’s look at another example. Amanda runs a small, local coffee shop in Ann Arbor, Michigan, where she sells great coffee and the best muffins. She loves it when her customers pay cash, but, even though there’s a fee, she lets them pay with a credit card–which is the preferred payment method by consumers in the U.S. As per her deal with her credit card issuer, she doesn’t get the payment on the day she makes the sale. So, that is also a part of her AR, which includes any amount of money from purchases made on credit that she hasn’t yet received.
To make sure Christopher’s and Amanda’s businesses run smoothly, they have to be sure they are getting those payments on time. And so should you. As a small business owner, AR is super important because that’s the money you’re expected to receive, which is vital for your business. It’s important to keep track of all the money you are owed and take it into consideration when you plan your spending.