Technically speaking, "accounts receivable are legally enforceable claims for payment held by a business for goods supplied and/or services rendered that customers/clients have ordered but not paid for" (thanks Wikipedia!).

In simple english, accounts receivable occur when a company allows their customers to pay after they are invoiced (i.e. the customers are provided credit).

When a company provides credit to their customers there are definite implications in terms of cash flow forecasting. Why? Because there is now a longer time separation between work carried out by a company and actual payment for that work by their customer.

This means that the company pays for expenses (such as salary, rent, inventory, etc.) and carries these costs for a longer period before receiving final payment. They therefore need to plan their finances more pro-actively to ensure success, answering questions such as (to name only a few):

  1. What if a customer doesn't pay as expected (i.e. they take longer)?
  2. What if a customer doesn't pay all of what is due?
  3. What if there are unexpected expenses incurred before a large customer payment is received?

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