What Causes Accounts Receivable to Increase?

Accounts receivable (AR) represents money owed to a business by its customers for goods or services delivered but not yet paid for. An increase in accounts receivable can stem from various business activities and internal processes. Understanding these causes is important for maintaining healthy cash flow and operational stability.

Sales Growth and Credit Terms

A significant driver of increased accounts receivable is a rise in sales volume, particularly when a substantial portion of sales are made on credit. As a business expands its customer base or increases order sizes, the amount customers owe grows. Successful sales initiatives, while positive for revenue, will lead to higher AR balances.

Changes in a company’s credit policy directly impact accounts receivable levels. Extending credit terms, such as offering customers 60 days to pay an invoice instead of 30 days, means funds remain tied up in receivables longer. Similarly, relaxing credit standards by approving customers with lower credit scores or less established payment histories can increase credit sales. This approach, while potentially boosting sales, also elevates the risk of slower payments and higher AR. Even if overall sales volume remains constant, an increase in the proportion of sales made on credit compared to cash sales will cause accounts receivable to rise.

Collection Process Efficiency

The effectiveness of a company’s collection efforts significantly influences its accounts receivable balance. Even if sales are consistent and credit terms remain unchanged, AR can increase if payment collection becomes inefficient. Delays occur when customers take longer than the agreed terms to pay their invoices, leading to an accumulation of overdue receivables.

A lack of consistent follow-up on outstanding invoices contributes to extended payment cycles. Without regular communication, customers may overlook payment obligations, causing invoices to age. Customer disputes over charges, service quality, or delivery can halt payment until a resolution is reached. Such unresolved issues can keep an invoice in accounts receivable for an extended period. Ineffective collection strategies, such as a reactive approach, can result in an increasing backlog of uncollected payments.

Operational and Billing Issues

Internal company processes related to billing and record-keeping can inadvertently lead to an increase in accounts receivable. Errors on invoices, such as incorrect amounts, wrong items, or duplicate billing, often cause customers to delay payment until discrepancies are resolved. These inaccuracies require time and resources to correct, prolonging the collection cycle.

Delayed invoicing also contributes to higher accounts receivable because the payment clock does not begin until the invoice is sent. Poor record-keeping, including inaccurate or disorganized tracking of payments received, can lead to miscommunication with customers or delays in clearing accounts. This can result in chasing payments already made or misapplying funds. Systemic issues within accounting software or billing systems can create inefficiencies in generating, sending, or tracking invoices and payments. These limitations can slow down the entire accounts receivable process, leading to increased outstanding balances.