Accounts receivable (AR) represents money owed to a company by its customers for goods or services delivered but not yet paid for. It is a current asset on the balance sheet and a key driver of working capital and cash flow. FP&A teams forecast AR to predict cash collection timing and manage liquidity.
In Depth
Accounts receivable is the gap between earning revenue and receiving cash. When a company invoices a customer with 30-day payment terms, the revenue is recognised immediately on the P&L, but the cash does not arrive for a month. This timing difference is captured on the balance sheet as accounts receivable.
Days Sales Outstanding (DSO) is the primary metric for managing AR efficiency. It measures the average number of days it takes to collect payment after a sale. DSO = (Accounts Receivable / Revenue) x Number of Days. Lower DSO means faster collection and better cash flow.
FP&A teams model accounts receivable using DSO assumptions applied to revenue forecasts. If monthly revenue is £500K and DSO is 45 days, the expected AR balance is approximately £750K. Changes in DSO — whether from changing customer mix, new payment terms, or collection efficiency — have a direct impact on cash flow forecasts.
Aging analysis categorises receivables by how overdue they are: current, 30 days, 60 days, 90 days, and beyond. This analysis informs bad debt provisioning and identifies collection problems before they become material. FP&A teams should incorporate an allowance for doubtful debts in their forecasts.
For UK businesses, the Late Payment of Commercial Debts (Interest) Act gives companies the right to charge interest on late payments. However, many businesses are reluctant to enforce this for fear of damaging customer relationships. The Prompt Payment Code is a voluntary standard encouraging payment within 30 days.
Real-World Example
A UK B2B services company has £1.2M in accounts receivable on a revenue run rate of £600K per month, giving a DSO of 60 days. The FP&A team identifies that the DSO has crept up from 45 days over the past year, primarily due to three enterprise clients paying on 90-day terms. This £300K increase in AR (the DSO change from 45 to 60 days applied to monthly revenue) directly reduced available cash, requiring the company to draw on its overdraft facility.
Related Terms
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Working capital is the difference between a company's current assets and current liabilities, repres...
Accounts payable (AP) represents money a company owes to its suppliers for goods and services receiv...
Reconciliation is the process of comparing two sets of financial records to verify they are consiste...
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