Receivable

A receivable is an asset representing a monetary claim against another entity, typically arising from the sale of goods or services on credit. It signifies the amount of money owed to a business by its customers, clients, or debtors. Receivables are a vital component of a company's working capital, impacting its liquidity and financial health. They are recorded on a balance sheet as an account receivable (AR) and represent the future inflow of cash the company expects to receive. Careful management of receivables, including credit terms and collection efforts, is essential for maintaining healthy cash flow and minimizing bad debt. A receivable can also occur on the income statement as the accrual of the revenue that has not been received.

Receivable meaning with examples

• The company's balance sheet showed a significant increase in accounts receivable due to a surge in sales during the holiday season. This indicates that a substantial amount of money is owed to the company by its customers, which the company expects to be paid back. Managing these receivables is crucial, including credit terms, to ensure timely cash flow. This information is then added to the income statement when the revenue is accrued, which adds to the cash flow of the company.
• After offering generous payment terms, the retailer closely monitored its accounts receivable aging report to identify overdue invoices. They want to keep the number of days the receivables are outstanding. This allowed them to proactively contact customers and initiate collection efforts, minimizing the risk of bad debt and maintaining a healthy cash flow to be able to afford the expenses the company needs to pay.
• The business factored its receivables to quickly convert them into cash, but at a discounted rate. The company was in need of cash to cover the expenses and needed to make it. The financial institution purchased the receivables from the business, which made it available to the business with a fee. This offered a quick solution to the business for cash flow management.
• A consulting firm generated substantial receivables after completing several large projects for its clients, the consultants knew they were not going to be paid until the project was completed. The consultants now must now monitor the creditworthiness of their clients, ensuring that payments are received in a timely manner and preventing bad debts. This would help the consultants to manage the company's working capital.