Accounts Receivable on Balance Sheet (Free Sample for Contractors)
- Cost Construction Accounting
- Apr 21, 2023
- 3 min read
Updated: Oct 3
What makes a fruitful construction company different from a poor one is how successful it is at managing its Accounts Receivable (AR). It is important to send out invoices and collect money quickly, but it is also important to know where accounts receivable are shown on your construction balance sheet. In this blog, we'll discuss how accounts receivable affect your balance sheet and how you can improve your AR processes to maximize your cash flow.
Table of Contents:
Accounts Receivable on Balance Sheet: What is A Balance Sheet Anyway?
Accounts receivable represents money owed to your company by customers for goods or services already delivered but not yet paid for. This amount is recorded as an asset on the company’s balance sheet.
A balance sheet is a key financial statement that provides a snapshot of your company’s financial health at a specific point in time. It lists assets (what the company owns), liabilities (what the company owes), and equity (the owner’s interest). Understanding this structure is essential to knowing where accounts receivable appears on your balance sheet.
Is Accounts Receivable a Current Asset?
Accounts receivable, often abbreviated as AR, represents outstanding unpaid invoices from customers. It reflects the total accounts receivable that your company expects to collect in the short term, typically within a year, and is therefore classified as a current asset on the balance sheet.
While a high accounts receivable balance may indicate strong sales or credit sales, it also carries risks. Unpaid invoices can impact your company’s cash flow management and overall financial health, especially if customers delay payments or default.
Here is an example of how accounts receivable might be shown on a construction company’s balance sheet:
Get full access to the balance sheet sample free here:
Increase and Decrease of Accounts Receivable
An increase in your accounts receivable balance means your company has recorded more credit sales, resulting in more outstanding invoices to be collected in the future. This should ideally lead to increased cash inflows once payments are received.
Conversely, a decrease in accounts receivable indicates that customers have paid their invoices, converting those outstanding invoices into cash and improving your working capital.
Why Increased AR is Not a Good Sign
Although a large accounts receivable balance may seem positive, it represents money owed, not cash in hand. Some customers may delay payments or fail to pay altogether, leading to bad debt expense and negatively impacting your company’s financial statements.
Timely invoicing, regular follow-up on unpaid invoices, and consistent monitoring of your accounts receivable aging schedule are critical to reducing the risk of uncollectible accounts and maintaining healthy cash flow.
Automating your accounts receivable process can help streamline collections and improve your company’s accounts receivable turnover ratio, which measures how efficiently you collect payments.
A Solid Credit Policy & Payment Terms Help Avoid "Fake Revenue"
To safeguard your company’s financial health, ensure that your credit policy clearly outlines:
Eligibility criteria for extending credit to customers
Construction credit terms and payment schedules
Procedures for collecting unpaid invoices
Steps to take in case of late payments or defaults
Setting clear payment terms, such as “net 30” or “net 60,” defines the timeframe within which customers must pay their invoices. Offering early payment discounts can also incentivize prompt payments and reduce days sales outstanding (DSO), improving your cash conversion cycle.
In Conclusion
The success of your construction business depends on how well you handle your accounts receivable. By understanding where accounts receivable are on your balance sheet, you gain a clearer picture of your financial health and can make better decisions to improve cash flow.
Sending invoices on time, following up on collections, maintaining a solid credit policy, and setting clear payment terms will reduce the risk of unpaid accounts receivable and improve your chances of getting paid on time.
At Construction Cost Accounting, we specialize in helping construction businesses like yours optimize their accounts receivable processes. Our expert bookkeeping services ensure your financials are managed efficiently, improving cash flow and reducing the risk of bad debt.
Contact us today to learn more about how we can help streamline your AR processes and boost your bottom line.
