Parag Patel

Is accounts receivable considered an asset or a liability?

There are different theories on what exactly accounts receivable should be considered on a balance sheet. Most consider it an asset and something that can be leveraged against. However, anyone that has spent hours chasing payments may view it as a liability filled with uncertainty.

Accountants typically consider it an asset on the ledger. Business owners may disagree.

So, what IS A/R? How can you ensure that it’s more of an asset than a liability?

Is Accounts Receivable an Asset?

If a customer orders $5,000 worth of product, that is money that (theoretically) will be in your bank account. At least, in time. A transaction has been made in your favor and there’s no reason to believe that payment won’t be received.

As an asset, it allows for businesses to bower against it when more liquidity is needed. Have a lean month, but a fairly robust AR line? Banks will offer loans on that, with a reasonable rate. In most cases, it’s a current asset. If it takes more than a year, or is a note, it’s a long-term asset.

It’s also referred to as Net Realizable Value (NRV), the cash amount a company expects to receive. 

However, unless an account is actually settled, it’s not actually revenue. That can only be considered when actual payment is received.

Is Accounts Receivable a Liability?

Strictly speaking, no it’s not a liability. It’s money you’re contractually owed and is reflected as such on a balance sheet. However, it includes risk of reduced payments or no payment at all. That uncertainty has a price tag. It is not revenue - payroll can’t be funded directly from A/R.

A large number of outstanding accounts can certainly negatively impact business operations. It reduces liquidity and financial flexibility, which reduces a business’ capacity for maximizing revenue opportunities. 

Sure, short-term borrowing is an option, but it’s a far less attractive option than investing cash on-hand.

How to Maximize the Value of A/R

The best way to get the most of your A/R is to actually turn it into revenue. This is vital for any business. Cash flow keeps everything moving, be it product development, hiring or capital improvements. Not having a regular cash flow transforms your A/R line from an asset into a liability.

The best way to avoid this is to have an automated collections strategy. Having structured responses for accounts that are 30, 60 and 90 days late will increase payments for existing orders and future transactions.

Your basic collections strategy should include:

  • Automation - Create templates and schedules to communicate with your customers
  • Plainly articulate payment terms - Spell out to your customers when payment is due
  • Consider early payment discounts - Provide an incentive for customers that pay promptly
  • Offer payment plans - Be willing to work with customers that may have difficulty paying
  • Make it easy - Give customers a variety of payment options and provide them a portal to pay at their convenience

You may also consider turning Accounts Receivable Turnover (ART) ratio into a North Star metric. ART measures the number of times a year a business collects its average accounts receivables. It looks at how effective you are able to provide credit and collect payments in a timely manner.

Net Annual Credit Scores ÷ ((Beginning Accounts Receivable + Ending Accounts Receivable)/2)

Whatever your business ultimately considers A/R, it’s important to have a strategy that will effectively highlight it as an asset or reduce the impact as a liability. Using a comprehensive, automated platform will help you maximize the former and minimize the later.

Ready to get your A/R organized and accelerated? Schedule a demo today!