Accounts Receivable: Your Money in Someone Else’s Pocket

Accounts Receivable: Your Money in Someone Else’s Pocket

Accounts receivable is money or other assets that customers, suppliers, employees, or other individuals and companies owe your business.

The simplest example is when you have already delivered a product or completed the work, but the customer will pay later. The sale has taken place, the invoice has been issued, but the money has not yet reached your bank account.

In accounting, accounts receivable is considered a business asset. However, you cannot use it to pay rent, salaries, or taxes until the debtor actually pays. That is why a business may look healthy in financial reports while still experiencing a cash shortage.

Let’s explain in simple terms what accounts receivable is, how it differs from accounts payable, when it is a normal part of doing business, and when it becomes dangerous.

What Is Accounts Receivable in Simple Terms?

Imagine that you have completed an order and the customer says:

“Thank you. I’ll pay in two weeks.”

From that moment, the customer owes you money. You have already fulfilled your part of the agreement, but you are still waiting for payment.

In simple terms, your money is still sitting in the customer’s pocket. It should come back to you, but you cannot use it yet.

That is accounts receivable.

Debtors are people or companies that owe something to your business. This may include not only money, but also goods, services, or other assets.

Accounts receivable may therefore include:

• customer debts for goods or services you have already provided;

• advance payments to suppliers when you have paid but have not yet received the goods or services;

• loans issued to employees or other individuals that have not yet been repaid;

• other amounts that must be returned to your business.

Most often, when people talk about accounts receivable, they mean unpaid customer invoices.

Accounts Receivable and Accounts Payable: What Is the Difference?

These terms are easy to confuse, although the difference is simple:

• accounts receivable — money owed to you;

• accounts payable — money you owe.

For example, a customer must pay you ₴30,000 for a completed order. That is your accounts receivable.

At the same time, you must pay a supplier ₴20,000 for materials. That is your accounts payable.

A healthy business should monitor both figures at the same time:

• how much others owe you;

• how much you owe and when you must pay it.

The problem arises when your own obligations must be paid today, while customer payments will not arrive for several weeks.

The Main Trap: Sales Are Growing, but There Is No Cash

Let’s look at a simple example.

You completed an order worth ₴40,000. Under the agreement, the customer has 30 days to pay.

The order has already been completed. The company may already recognise revenue from the sale in its financial records. However, the actual ₴40,000 is not yet in the account.

You cannot currently use that money to:

• pay salaries;

• pay rent;

• purchase materials;

• settle supplier invoices;

• pay taxes or bank fees.

Now imagine that you have ten such customers.

During the month, the business sold ₴400,000 worth of goods and services, but most invoices remain unpaid.

On paper, the company may report revenue and even profit. Yet it may still lack the cash required for everyday payments.

This is how accounts receivable can cause a cash flow gap: payments are due now, while your money is still with your customers.

At the same time, it is important to consider the accounting and tax system used by a particular business.

For example, under Ukraine’s simplified tax system, taxable income is generally recognised when funds are received rather than simply when goods are delivered or work is completed. Therefore, the statement that “the sale has already become taxable income” is not true for every business.

The main rule remains simple:

A sale and the receipt of payment are two separate events.

Accounts receivable shows the amount that exists between these two events: you already have the right to receive the money, but you have not yet received it.

Deferred Payment Is a Loan to Your Customer

When you allow a customer to pay later, you are effectively financing them with your own money.

The customer has already received your product or the result of your work, while you will receive payment in 7, 30, or 60 days.

Deferred payment can be a useful tool. It may help you:

• attract a major customer;

• simplify cooperation with a long-term partner;

• make your offer more attractive;

• support long-term business relationships.

However, this arrangement comes at a cost to your business.

Until the customer pays:

• the money cannot work inside your business;

• you may lack funds for current expenses;

• there is still a risk of late payment or non-payment;

• you may be forced to borrow money yourself.

That is why deferred payment should be offered deliberately: for a clearly defined period, only to reliable customers, and only within an amount your business can afford to go without temporarily.

When Accounts Receivable Becomes Dangerous

The existence of accounts receivable does not automatically mean the business has a problem.

If customers pay within the agreed terms and the company has enough cash to meet its own obligations, deferred payment may simply be a normal part of doing business.

However, several warning signs deserve attention.

Accounts Receivable Is Growing Faster Than Sales

Sales remain almost unchanged, but the total amount customers owe increases every month.

This may mean that customers are paying more slowly or that the company is too willing to work without advance payment.

Overdue Payments Are Increasing

An invoice whose due date has not yet arrived is one thing.

A debt that should have been paid a month ago but remains unpaid is something entirely different.

The longer a customer delays payment, the more attention the debt requires.

Some Debts Become Difficult to Recover

The customer stops responding, faces serious financial problems, ceases operations, or directly refuses to pay.

In this situation, the debt may become doubtful and eventually bad debt.

Most of the Debt Depends on One Customer

For example, customers owe you ₴300,000 in total, but ₴250,000 of that amount belongs to one company.

Even if that customer has always paid on time, a single delay can affect the entire business.

The more accounts receivable is concentrated in one customer, the higher the risk.

Types of Accounts Receivable

For day-to-day debt management, it is useful to divide receivables according to their current status.

Current Receivables

The payment deadline has not yet arrived, or the debt is expected to be repaid soon.

For example, a customer receives an invoice due on 15 August, while today is only 5 August.

This debt is not yet overdue.

Overdue Receivables

The payment date has passed, but the money has not arrived.

This does not necessarily mean the customer will not pay. They may have forgotten, made a mistake, or delayed the payment for a few days.

However, the debt now requires a reminder and closer monitoring.

Doubtful Receivables

There is uncertainty about whether the debtor will repay the full amount.

For example, the customer repeatedly postpones payment, avoids communication, or is experiencing clear financial difficulties.

Bad Debt

There are sufficient grounds to believe that the debt cannot be recovered, or the statutory limitation period has expired.

In accounting, doubtful receivables and bad debt are subject to specific recognition and write-off rules.

That is why, in a particular situation, it is better to consult an accountant or tax adviser rather than simply deleting the debt from your records.

Official accounting rules also distinguish between current and long-term receivables depending on the operating cycle and the expected repayment period.

How to Keep Accounts Receivable Under Control

Record an Exact Payment Date

Every agreement should include a specific deadline.

Not:

“Payment will be made later.”

But:

“Payment is due by 20 August.”

Without an exact date, it is difficult to determine whether a debt is overdue and when it is time to remind the customer.

Agree on Advance Payment

Full or partial advance payment reduces the amount you risk not receiving.

For a new customer, you might agree on:

• 50% before work begins;

• 50% after completion.

This does not eliminate every risk, but it significantly reduces your exposure.

Send Reminders Before the Due Date

A polite reminder a few days before payment is due is a normal business practice.

For example:

“Hello! This is a reminder that invoice No. 125 for ₴18,000 is due on 12 August.”

This message does not accuse the customer and may prevent a situation where the invoice was simply overlooked.

Check New Customers

Before completing a large order without advance payment, check:

• how long the customer has been operating;

• whether there are any visible signs of financial trouble;

• how they have paid other partners;

• whether they are willing to sign an agreement with clear payment terms.

Set a Credit Limit

Define the maximum amount a particular customer may owe you at any one time.

For example:

“We can continue working on deferred payment terms while the total outstanding balance remains below ₴50,000.”

Once the customer reaches that limit, the next order is completed only after previous invoices have been paid.

Review Debts Regularly

Do not wait until the end of the year or until you no longer have enough cash to pay suppliers.

At least once a week, review:

• total receivables;

• upcoming payment dates;

• overdue payments;

• the largest debtors;

• amounts whose recovery is uncertain.

How to Tell Whether Customers Are Paying More Slowly

This is where accounts receivable turnover indicators are useful.

In simple terms, they help answer one question:

How much time passes, on average, between a sale and receiving the money?

For example, customers previously paid within 20 days on average, but now take 38 days.

Even if sales remain unchanged, your business is now waiting almost twice as long for its money.

A small business does not always need to calculate complex financial ratios immediately.

At first, it is enough to compare the following figures every month:

• the total amount customers owe;

• the amount already overdue;

• the actual number of days customers take to pay;

• the share of total receivables represented by your largest customers.

If these indicators are getting worse, accounts receivable is gradually moving out of control.

How to See Who Owes You and How Much

The problem is rarely one individual debt.

The real difficulty begins when there are many customers and you need to remember:

• who owes you;

• how much they owe;

• what the debt relates to;

• when payment is due;

• how much has already been repaid;

• who is overdue;

• who has already received a reminder.

When this information is scattered across a notebook, Excel, banking apps, and messenger conversations, individual debts are easy to lose track of.

BizFin has a Debts section with an Owed to Me tab for this purpose.

Each debt can be stored as a separate record with an amount, due date, and repayment status.

This gives you more than a total figure. You see the complete picture:

• who must return the money;

• how much remains outstanding;

• when payment is due;

• which debts are already overdue;

• which payments require attention first.

The Owed to Me indicator shows the total amount your business is entitled to receive, while the Overdue indicator helps you immediately identify debts whose deadlines have passed.

In the Balance Sheet report, accounts receivable is shown among the company’s assets.

You can also see your own liabilities alongside it — not only how much others owe you, but also how much your business must repay.

Instead of searching through notes, you get one clear place to monitor every debt.

What You Should Remember

A sale is not the same as receiving money. You may have already completed the order but still wait several weeks for payment.

Accounts receivable is an asset, but not available cash. Until the customer pays, you cannot use that amount to settle your own bills.

Deferred payment means you are financing the customer. Offer it deliberately, for a defined period, and only within an amount your business can temporarily afford not to receive.

Overdue and doubtful debts require the most attention. The earlier you identify them, the greater the chance of recovering the money.

Monitor payment terms, not only sales. A business may sell a lot and still suffer from a cash shortage.

Frequently Asked Questions

What Is the Difference Between Accounts Receivable and Accounts Payable?

Accounts receivable is what others owe you.

Accounts payable is what you owe others.

For example, an unpaid customer invoice is your accounts receivable. An unpaid supplier invoice is your accounts payable.

Is Accounts Receivable Good or Bad?

By itself, it is neither good nor bad.

Deferred payment may be a normal part of customer relationships. The problem begins when debts become too large, payment terms are constantly missed, or the business lacks enough money to meet its own obligations.

Healthy accounts receivable is debt that customers repay within the agreed terms.

Is Accounts Receivable Profit?

No. These are different financial indicators.

Accounts receivable is an asset: money or other value that must be transferred to your business.

Profit is the financial result after revenue and expenses have been taken into account.

A sale on deferred payment terms may affect revenue and profit in accounting, but accounts receivable itself is not equal to profit.

What Is Bad Debt?

Bad debt is an amount that is unlikely to be recovered or for which the statutory limitation period has expired.

For example, the debtor may have ceased operations, may have no assets available for repayment, or other recognised grounds may exist for classifying the debt as bad.

Its accounting, taxation, and write-off treatment depends on the specific circumstances.

It is therefore advisable to consult an accountant before writing it off.

Is an Advance Payment to a Supplier Considered Accounts Receivable?

Yes.

You have already transferred the money, while the supplier still has to fulfil their part of the agreement by delivering goods, completing work, or providing a service.

In other words, the supplier does not necessarily owe you money. They may owe you the corresponding goods or completed work.

What Is Accounts Receivable Turnover?

It is an indicator of how quickly customer debts turn into actual cash.

In simple terms, it shows how long customers take, on average, to pay.

The faster they pay, the less money remains tied up in receivables.

Why Does the Business Show a Profit but Have Little Money in the Bank?

One possible reason is unpaid customer invoices.

Revenue from sales may already be included in the financial result, while the money itself has not yet arrived.

Other possible reasons include:

• purchases of goods or equipment;

• loan repayments;

• advance payments to suppliers;

• repayment of previous debts;

• differences between revenue, expense, and actual payment dates.

That is why the profit and loss statement should be reviewed alongside cash flow and accounts receivable.

Conclusion

Accounts receivable shows how much money or other value your business is still entitled to receive.

It can be a normal part of sales, but only when payment terms are controlled, customers pay on time, and the company has enough cash for everyday operations.

The danger does not begin when a customer asks for deferred payment.

It begins when you no longer know exactly who owes you, how much they owe, or how long the debt has been outstanding.

In BizFin, all such debts can be stored in one place. You can see the total amount, identify overdue payments in time, and prevent earned money from quietly disappearing from view.