What Is a Receivable and Why Does It Matter?

A receivable is money owed to a company by its customers or other entities. This financial asset arises when a business provides goods or services on credit, meaning payment is not received at the time of the transaction. Understanding receivables is important for comprehending how businesses manage their money and operations.

Understanding What a Receivable Is

A receivable signifies a claim a business has against another party for cash. This claim originates from a sales transaction where goods or services are delivered, but payment is deferred. For example, when a company invoices a customer for products or services, the amount due becomes a receivable until the customer remits payment.

Receivables are future cash inflows a business anticipates. The seller earns revenue by fulfilling their agreement, even if cash has not yet been collected. This concept is central to accrual accounting, where revenues are recognized when earned, not when cash changes hands.

Common Types of Receivables

Receivables are categorized by their origin and formality. The most common type is “Accounts Receivable” (AR), representing money owed by customers for goods or services purchased on credit during normal business operations. These are short-term, unsecured claims, often from invoices with payment terms like “Net 30 days.” Accounts receivable are common for businesses extending credit, such as a wholesaler selling to a retail store.

“Notes Receivable” are more formal claims evidenced by a written promise to pay, known as a promissory note. Unlike accounts receivable, notes receivable often include interest and have specific maturity dates, which can extend for longer periods, sometimes exceeding a year. These are used for larger, structured credit arrangements or when a customer needs an extended payment period.

“Other Receivables” encompass various non-trade amounts owed to a company. Examples include employee advances, interest earned but not yet received, or tax refunds due from government authorities. These claims arise from transactions outside the company’s regular sales activities.

How Receivables Appear in Financial Statements

Receivables are reported on a company’s balance sheet, which provides a snapshot of its financial position. They are classified as assets because they represent future economic benefits—the expectation of receiving cash. Accounts receivable are listed as current assets.

Current assets are those expected to be converted into cash within one year or the company’s normal operating cycle, whichever is longer. This classification reflects the expectation that these amounts will be collected quickly. When a company makes a sale on credit, it records an increase in both its accounts receivable (an asset) and its sales revenue. Once the customer pays, the cash balance increases, and the accounts receivable balance decreases, reflecting the conversion of the claim into liquid funds.

Why Receivables Matter to a Business

Receivables are important for a business’s operational flow and overall financial stability. They directly influence a company’s cash flow and liquidity, representing future cash inflows that will fund operations. A business relies on the timely collection of these amounts to pay its own expenses, invest in growth opportunities, and maintain solvency.

Even though receivables are not yet cash in hand, they are a significant component of a company’s working capital, which is the difference between current assets and current liabilities. Effective management of converting receivables into cash is important for a business to meet its short-term obligations and sustain its activities.