What Is Accounts Receivable?
Accounts receivable is the money owed to a business by its clients for invoices that have been sent but not yet paid. For contractors, AR accumulates every time a job is completed and invoiced but the payment has not yet been collected. AR is recorded as an asset on the balance sheet because it represents money the business has legally earned and expects to receive. However, AR that sits unpaid for too long becomes increasingly difficult to collect.
- Total AR: the total of all unpaid invoices at the end of the period
- Total Revenue: all revenue invoiced during the measurement period
- Number of Days: the number of days in the measurement period (typically 30 or 90)
Why It Matters to Contractors
AR is money the business has earned but not yet received. Letting it age without follow-up is one of the most common ways contractors hurt their own cash flow. A business can be fully booked and profitable on paper while struggling with cash flow simply because clients are slow to pay. Tracking AR by aging bucket shows which clients pay consistently, which ones need follow-up, and which invoices are at risk of going uncollectable.
How It Works
When a job is invoiced, the invoice balance moves into accounts receivable. It stays there until the client pays. AR aging reports organize outstanding invoices into buckets based on how many days they have been outstanding: current, 1 to 30 days past due, 31 to 60 days, 61 to 90 days, and 90 days or more. Invoices in the older buckets require immediate follow-up because the probability of collection decreases significantly after 90 days.
A contractor has six outstanding invoices: two for $1,200 each issued this week (current), two for $3,400 each issued 35 days ago (31 to 60 day bucket), and one for $800 issued 75 days ago (61 to 90 day bucket). Total AR is $10,000. The two 35-day invoices and the 75-day invoice are flagged for follow-up immediately. The 75-day invoice, at $800, should receive a direct phone call.
Accounts Receivable vs. Work-in-Progress
Accounts receivable represents invoices sent to clients that have not yet been paid. Work-in-progress represents work that has been performed but not yet invoiced. Both are assets, but they sit at different points in the revenue cycle. Understanding both gives a complete picture of how much money a contractor has earned and not yet collected, split between what has been billed (AR) and what has not yet been billed (WIP).
How Contractors Track This
AR is tracked through invoicing software that shows the status and age of every outstanding invoice. Setting up automatic payment reminders at 30, 60, and 90 days reduces the manual follow-up burden. Integrating invoicing with QuickBooks keeps the AR report current automatically as payments are recorded.
Related Terms
Frequently Asked Questions
What is a good accounts receivable aging target for contractors?
Most contractors aim to keep the majority of their AR in the current or 1 to 30 day bucket. An invoice collection rate above 95% (meaning 95% or more of invoices are paid within 90 days) is a reasonable benchmark. When more than 10% to 15% of AR sits in the 60-plus-day bucket, it indicates a collection problem that is worth investigating systematically.
What is Days Sales Outstanding (DSO) for contractors?
DSO is the average number of days it takes a contractor to collect payment after an invoice is sent. A DSO of 30 days means clients are paying, on average, 30 days after receiving an invoice. A DSO of 60 or more days signals slow collection and a cash flow risk. Tracking DSO over time shows whether payment collection is getting faster or slower.
When should a contractor write off bad AR?
Most accountants recommend writing off an invoice as bad debt after 90 to 180 days of non-payment and after reasonable collection efforts have been exhausted. The write-off removes the balance from AR and records it as an expense, which at least produces a tax deduction. Before writing off, most contractors send a final demand letter and, for larger amounts, consider small claims court or a collections service.