Explaining receivables

Accounts receivable are critical to cash flow. Accounts receivable is the accounting word for money owed to you by your customers. Most business-to-business transactions involve sales on credit, usually 30-day terms, and that leads to accounts receivable.

Try this: loan a dollar to a friend. Immediately your accounts receivable go up one dollar, and your cash balance goes down a dollar.

That's what happens in business, too. If you sell on credit, every dollar of increased receivables is a dollar you don't have in cash. It's in your sales, but not in your bank account.

That's why cash flow is included in a business plan, and why receivables are included in cash flow. It is far too easy for a business to have profits without cash. Receivables are the main reason why.