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Changes in Accounts Receivable |
WIKI ANALYSIS| This article is part of WikiProject Definitions. Consider editing to improve it. View articles referencing this definition. |
Changes in Accounts Receivable is any increase or decrease in the cash a company is owed by its customers.
Changes in accounts receivable is important because it's one of several ways that a company's reported net income can differ from the actual cash coming in the door.
Because companies accrue profits, they can book revenue (and, ultimately, net income) they are owed by their customers on their income statement, even before this revenue has actually been collected - under the accrual method of accounting, it's enough to have received a commitment to pay from the customer.
If the company's accounts receivable increases or decreases, net income is mostly unaffected - but cash flow is impacted.
Increases in accounts receivable that are disproportionate to any growth in revenue may indicate the company is having trouble collecting money from its customers. Depending on the company's cash situation, this could require the company to borrow money to plug the hole from the unpaid money it is owed by its customers. Eventually, the company might need to write-off some of these accounts receivable as bad debt, in recognition of the fact that some customers might never pay. In extreme cases, the company might run out of cash and have to shut down.
Example
Company XYZ's Accounts Receivable was $10 million. Then, XYZ closed a $5 million sale with a new client, who paid with credit. Although the company accrues the increase in revenue from the new sale, no actual cash has come in the door yet. As a result, revenue and net income increase, but cash flow would not increase until the customer paid XYZ's bill. The difference would be explained by the $5 million increase in accounts receivable.
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