Your books can show a profitable month while your bank balance still feels short. The gap often comes from accounts receivable (AR). It's the money customers owe your business for goods or services you've already delivered but haven't received payment for yet. Until customers pay, those invoices provide no spendable cash.
On the balance sheet (the report of what your business owns, owes, and retains), AR appears as a current asset, something you expect to collect within a year. It connects completed sales to the cash you'll collect later, which explains why recorded revenue and available cash don't always move together.
How accounts receivable works in your books
You create accounts receivable when you deliver goods or services and allow the customer to pay later. The invoice stays in AR until payment clears. Credit terms such as net-15, net-30, or net-60 give the customer 15, 30, or 60 days after the invoice date to pay.
From invoice to payment
On the invoice, record the amount owed and the due date. Cover the invoice fundamentals so the customer sees exactly what they owe and when payment is due.
You have a legal claim to the money. The same money shows up on your customer's books too: your accounts receivable is their accounts payable (one transaction, two ledgers, opposite sides).
When your customer pays determines how AR affects your day-to-day cash. Under accrual accounting, you record revenue when you earn it. Finish the work in March, invoice on net-30, and the revenue lands in March's books while the cash arrives in April.
When payment arrives, the amount moves from AR to cash on the balance sheet. Because you already recorded the revenue when you earned it, the payment doesn't create another round of revenue. As a result, the revenue shown for a month may not match the customer payments deposited during the same month.
Common AR arrangements in practice
Your AR ledger shows specific unpaid invoices whenever delivery and payment happen at different times. A few common billing arrangements that produce AR:
Retainer billing on net terms: You invoice a recurring client (for example, on net-30) at the start or end of each service period.
Trade credit after shipment: You ship goods and give the customer a fixed window, often 30 to 60 days, to pay.
Milestone billing: You bill and collect a portion of a project fee as each phase closes.
Recurring monthly billing for ongoing services: You invoice once a month for maintenance or subscription work already performed.
Completed-work billing: You invoice after delivering a one-time service and let the customer pay on agreed terms.
These arrangements differ in billing schedule and payment terms. Carrying unpaid invoices is a normal part of selling on credit, so their presence alone doesn't mean collection has gone wrong.
Each balance should remain traceable to a customer, invoice date, due date, and amount. That detail lets you see exactly what makes up the total AR figure on your balance sheet. Without regular review, a 30-day invoice can become 90 days outstanding without anyone following up.
Why accounts receivable affects cash flow
Accounts receivable affects cash flow by putting customer payments on a different schedule from payroll, rent, and supplier bills. Payroll leaves every two weeks, and rent is due on the first. Supplier invoices follow their own terms, while receivables arrive on the customer's schedule. The mismatch between those calendars creates a cash flow gap that the profit and loss statement doesn't show.
The bank balance shows only part of the picture. It only reflects transactions that have cleared, so it leaves out what customers owe you and what you've committed to spend. By relying only on the balance, you miss both incoming receivables and committed spending. Keeping collected cash separate from money you've assigned to upcoming bills—for example, using separate checking accounts in Relay business banking—makes available and committed cash easier to tell apart at a glance.
Uneven cash flow strains small employers, and receivables timing routinely contributes to it. Slower receivables can affect decisions and due dates in several ways:
A delayed hire
A postponed equipment purchase
A missed opportunity, even when the underlying work remains profitable
A late supplier payment
A tighter window for covering payroll or rent
In the Federal Reserve Banks' 2025 employer firms report, 51% of employer firms cited uneven cash flow as a financial challenge in the prior 12 months.
Looking at open receivables alongside upcoming payroll, rent, supplier bills, and other commitments gives you a more useful view of what you can afford and when.
How to track accounts receivable
Track accounts receivable by running an aging report and calculating days sales outstanding (DSO) on a regular schedule. The aging report prioritizes balances that need attention, while DSO shows whether collection is speeding up or slowing down.
Using an accounts receivable aging report
An accounts receivable aging report sorts every unpaid invoice by days outstanding so you can act on the balances that need attention first. A balance that crosses from 30 to 31 days past due moves into the next follow-up bucket. A simple aging report for a business with a handful of open invoices might group balances this way:
Aging bucket | Amount outstanding | What to do |
|---|---|---|
Current (not yet due) | $22,500 | Nothing yet; confirm that the customer received the invoice |
1–30 days past due | $9,800 | Send a friendly written reminder with the invoice attached |
31–60 days past due | $6,200 | Call the customer's accounts payable contact; get a payment date |
61–90 days past due | $4,000 | Send a formal demand; pause new work on credit for this customer |
90+ days past due | $1,500 | Use an outside agency or formal collections process to pursue payment. If collection looks unlikely, ask your bookkeeper or accountant about a write-off, which records that you don't expect to collect the invoice. |
Review the report on the same day each week and act on anything that moved into a new bucket so overdue invoices don't accumulate.
Update payment data in your accounting software before using the report to plan follow-ups. Before making calls, check every past-due invoice against the bank feed and match each customer payment to the right invoice in QuickBooks Online. Relay's two-way sync with QuickBooks Online keeps the related banking and bookkeeping data aligned.
Measuring collection speed with DSO
Days sales outstanding (DSO) measures the average number of days between invoicing a customer and collecting payment. For a 90-day review, divide your average accounts receivable by net credit sales for the same period, then multiply the result by 90.
DSO = (Average Accounts Receivable ÷ Net Credit Sales) × 90
If average AR is $24,000 and net credit sales are $72,000, DSO is ($24,000 ÷ $72,000) × 90 = 30 days.
To find average AR, add your beginning and ending AR balances, then divide by two. For net credit sales, subtract returns and allowances from your credit sales. Together, those figures make DSO a useful summary metric for whether collection is speeding up or slowing down.
No universal number makes a DSO "good." Compare it with the terms you offer: if you invoice net-30 and your DSO sits a few days past 30, you're running close to your terms. A rising DSO across several months shows that collection is slowing, regardless of the absolute number. Tracking the same calculation each month makes the trend easier to spot before a few slower payments become a broader cash flow problem.
A cash flow management routine pairs AR with upcoming obligations, while AR tracking isolates how quickly owed money becomes usable cash.
Collecting receivables faster
To collect receivables faster, build follow-up into your process instead of relying on memory. A fixed reminder routine catches late business-to-business (B2B) invoices before they turn into a cash flow problem.
Invoice the day work completes: Every day between finishing and billing adds a day to collection before the payment clock even starts. Create and send the invoice from your Relay account as soon as work is done, then track it there. Relay Invoices also supports recurring invoices.
Set expectations in writing before work starts: Put the payment terms and due date in the agreement. If you charge a late fee, include it too.
Make paying easy: Electronic payment options remove mailing time and may shorten the payment process.
Follow a fixed reminder schedule: Send a reminder at the due date, then call and decide whether to escalate if the customer doesn't answer.
Require deposits on large or first-time engagements: A deposit shrinks your exposure and screens for a customer's willingness to pay at all.
For every overdue invoice, assign one person to record each contact attempt, any promised payment date, and whether new work should pause. Recording those details creates a clear record for deciding when to escalate collection or ask your bookkeeper or accountant about a write-off. The same person should also flag any customer whose payment pattern has shifted, since a first late payment from a previously reliable customer warrants follow-up.
Put your receivables where you can see them
Accurate AR tracking connects earned revenue to collection timing and, ultimately, spendable cash. Keep every unpaid invoice tied to a customer, due date, amount, and follow-up status, then review aging and DSO on a regular schedule. When payment clears, move it from AR to cash and keep partial or disputed balances visible until they're resolved.
Once collected cash lands in your operating account, the next question is how much of it is already committed to payroll, taxes, and bills. With Relay, up to 20 checking accounts on Starter and Grow (10 for sole proprietors) plus automated percentage-based transfers move collected cash into dedicated accounts as it clears, so what's available and what's spoken for stay visible on their own. Opening a Relay account puts every invoice on that same system, tracked from earned revenue all the way to cash in the bank.
Frequently asked questions
When does an unpaid invoice enter accounts receivable?
An unpaid invoice enters AR after you've delivered the goods or services and given the customer time to pay. It remains there until the customer pays, you write off the balance, or another adjustment resolves it.
How often should you review accounts receivable?
A weekly review is usually enough. Use the aging report to catch invoices that have moved into a new past-due bucket before overdue balances sit unnoticed.
What should you do with an invoice that's more than 90 days past due?
Move an invoice that's more than 90 days past due into your formal collections process and decide whether payment still looks likely. You may use an outside collection agency or ask your bookkeeper or accountant whether a write-off is appropriate.
How do payment terms affect accounts receivable?
Payment terms set the number of days a customer has to pay after the invoice date. Terms such as net-15, net-30, and net-60 also provide a baseline for measuring whether your collection speed matches what you offer.
Is accounts receivable a debit or a credit?
Accounts receivable has a debit balance because it represents an asset your business expects to collect. Invoicing completed work increases AR with a debit, while receiving payment reduces it with a credit.
