Revenue may look strong on paper, but your company cannot use an unpaid invoice to cover payroll, invest in growth, or pay vendors.
That is why accounts receivable deserves more attention than a simple balance-sheet line item.
For startups and growing companies, a clear AR process helps connect recognized revenue to actual cash, maintain accurate financial statements, and spot collection issues before they create a larger cash-flow problem.
Accounts Receivable Is More Than a Balance Sheet Number
If you don’t track your accounts receivable, your balance sheet will be missing assets. While it’s not cash in your hand yet, AR is cash to which your company is entitled. Carefully tracking that balance — and making sure it gets paid to you as soon as possible — supports your cash flow. And since no company can thrive without healthy cash flow, AR is hypercritical.
Specifically, strong processes and visibility around your accounts receivable matter:
- At a high level: Because AR is an asset, you record it on your balance sheet as such. That makes it important to make sure you have the right number down. You might not think deviations matter too much. You can correct them when the money actually comes in, right? But accurate balance sheets power company success. You need true books to make smart decisions. Plus, investors expect you to be able to give them an accurate picture of your financial standing, and your balance sheet is a big piece of the puzzle there.
- Because AR matters at a high level, we always caution against overstating this asset. This commonly comes up when overeager sales teams send out contracts before they should, and the finance process captures those as revenue prematurely. You can also have overstated AR from simple errors, like duplicated invoices.
- At the customer level: Good AR practices matter beyond keeping your balance sheet accurate. Getting more granular, tracking accounts receivable helps you identify problem customers. You can see where you have balances outstanding, and get alerted when the same customer consistently pays late — or not at all. Initiating dunning (definitely below) early improves collectibility, so it literally pays to be proactive here.
Plus, AR matters to investors in another specific way. It ties into the way most want to see you maintain your books.
Accrual accounting and AR
Technically, AR exists when revenue has been recognized, but cash hasn’t yet been received. To understand that more clearly, it helps to break down the concept of accounting bases (as in the plural of “basis”).
There are two main types here:
- Cash basis, which means your company records revenue when it actually receives the cash (e.g., when an invoice is fulfilled)
- Accrual basis, which means your company records revenue as it’s earned (i.e., as your company delivers the good or service to your customer)
Cash basis is definitely simpler. But it overlooks a potentially large chunk of your company’s assets: money customers have promised that they haven’t yet paid.
Say you have a customer under contract to pay you $1,000 a month for a software subscription. They use that software all of April, but they don’t pay you until May 15. Accrual accounting lets you capture the $1,000 you’ve earned on April 31 instead of having to wait for the customer to pay.
This doesn’t just give you a clearer idea of the money you’re making. It’s a requirement of Generally Accepted Accounting Principles (GAAP), rules set by the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB).
Public companies have to comply with GAAP, but even early-stage startups might be subject to these rules, too. Investors often require GAAP-compliant books when getting on board with a startup. A lot of lenders and government agencies that issue grants mandate GAAP, too. Long story short, your company will almost certainly need to adopt accrual accounting eventually.
And that’s where AR lives. When you have revenue recognized on your books before the cash is in your hand, AR gives you a way to capture it — and then show it to investors.
Clearly, there’s a lot to know around AR. To make sure you’re measuring the right number for this asset and identifying problem customers interfering with your turnover, you need to establish a process for tracking accounts receivable. Zooming out to look at every step from order to cash generally delivers the best results here.
Build a Stronger Accounts Receivable Process
Accounts receivable affects your balance sheet, cash flow, customer relationships, and investor reporting. A clear order-to-cash process helps you recognize revenue accurately, collect payments faster, and spot issues before they grow.
Shay CPA helps startups and growing companies build stronger accounting processes and more reliable financial reporting. Contact us to discuss how we can improve your accounts receivable process.
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