Accounts Receivable (AR) represents money owed to your business by clients for services delivered or products sold but not yet paid. For professional service firms, AR consists of invoices sent to clients with payment terms (Net 30, Net 45, Net 60), creating a gap between service delivery and payment receipt. AR is classified as a current asset on your balance sheet because you expect to convert it to cash within one year.

Key characteristics of accounts receivable (AR)

• Current assets on the balance sheet

• Represents future cash inflows from completed work

• Tracked by client, project, invoice number, and aging buckets

• Directly impacts cash flow and working capital needs

• Aging categories: 0-30 days (current), 31-60 days (late), 61-90 days (overdue), 90+ days (collections risk)

Why accounts receivable (AR) matters for service firms

Professional service firms typically carry 30-90 days of revenue in AR at any time. A $2M annual revenue consulting firm with Net 30 terms averages $166,000 in AR. Fast-growing firms can become cash-constrained even while profitable if AR grows faster than cash collections. A 10-point improvement in Days Sales Outstanding (from 45 to 35 days) frees up approximately $55,000 in working capital for a $2M firm.

Example: AR aging snapshot for consulting firm

• Current (0-30 days): $85,000 - 5 invoices, normal collection

• 31-60 days: $42,000 - 3 invoices, follow-up needed

• 61-90 days: $18,000 - 2 invoices, urgent collection

• 90+ days: $8,000 - 1 invoice, potential write-off

• Total AR: $153,000

• DSO: 46 days (target: 35 days)

• Collection rate: 94.8% (industry benchmark: 96%+)

Related terms

• Days Sales Outstanding (DSO)

• Revenue Recognition

• Cash Flow

• Bad Debt Expense

• Working Capital