Accounts receivable (AR) is the money customers owe you for products or services you have already delivered but have not yet been paid for. It is essentially an IOU from your customers.
For example, if you deliver $50,000 worth of goods to a client with 30-day payment terms, that $50,000 sits in accounts receivable until the client pays. AR appears as a current asset on the balance sheet.
Managing AR efficiently is crucial for cash flow. If customers take too long to pay, your business might have plenty of revenue on paper but not enough actual cash to operate. The average collection period measures how quickly receivables are converted to cash.