Financial Reports: How to Read the Balance Sheet for Accounts Receivable

By Lita Epstein

Any company that allows its customers to buy on credit has an accounts receivable line on its balance sheet. On a financial report, accounts receivable is a collection of individual customer accounts listing money that customers owe the company for products or services they’ve already received.

A company must carefully monitor not only whether a customer pays, but also how quickly she pays. If a customer makes her payments later and later, the company must determine whether to allow her to get additional credit or to block further purchases.

Although the sales may look good, a nonpaying customer hurts a company because she’s taking out — and failing to pay for — inventory that another customer could’ve bought. Too many nonpaying or late-paying customers can severely hurt a company’s cash-flow position, which means the firm may not have the cash it needs to pay the bills.

Comparing a company’s accounts receivable line over a number of years gives you a good idea of how well the company is doing collecting late-paying customers’ accounts. Although you may see a company report positive sales numbers and a major increase in sales, if the accounts-receivable number is also rising rapidly, the business may be having trouble collecting the money on those accounts.