How Accounts Receivable Affects the Cash Flow Statement

Businesses offer credit options to trustworthy customers as a way to increase sales. When this happens, these businesses build up accounts receivable (AR). However, late payments reduce cash flow, making it harder to pay bills. For instance, customers owed UK small and medium-sized businesses an average of £27,214 in 2023¹.

These businesses reported that the reduced cash flow hurt their operations. This is unsurprising because cash flow relies on the timely collection of accounts receivable.

Therefore, accounts receivable must be managed to keep cash flow efficient. This is where a cash flow statement (CFS) comes in handy. It’s an important document that records your cash flow and helps you understand your business’s finances.

Read on to learn everything you need to know about accounts receivable and how it affects the cash flow statement. We’ll also touch on Wise Business, a cost-effective way to send business payments and receive money from abroad in multiple currencies, with conversions using the mid-market exchange rate.

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What is the cash flow statement and why is it important?

A cash flow statement is a financial document that shows how much money goes in and out of your business in an accounting period. It basically records the cash flow (inflow and outflow) of your business.

The cash flow statement is one of the three main financial statements, complementing the balance sheet and the income statement. This document enables businesses to monitor liquidity, understand cash flow patterns, and make informed financial decisions.

The cash flow statement divides financial activities into three parts: operating, investing, and financing. In the subsequent section, we will discuss more about the three parts of the cash flow statement but before that let’s talk about accounts receivable which is a component of operating activities.

What is accounts receivable and why is it important?

Accounts receivable is the total amount of money customers are owing your business for services or goods delivered but not yet paid for. The timeframe for payment depends on the agreement between you and your client. It can range from a few days to 30 days, 60 days, 90 days, or, in some cases, up to a year.

You can therefore record this transaction as an asset on your balance sheets because it is a legally enforceable transaction. Accounts receivable are also considered liquid assets because they can be used as collateral to secure a loan to help the company meet its short-term obligations.

Receivables are part of a company's working capital. Just like cash, inventory and securities, accounts receivable are also classified as current assets, because the account balance is expected from the debtor in one year or less.

So many businesses provide this for example if you are a marketing agency and set clients up on 30-day payment terms. So, you send an invoice after the project is delivered, and your client promises to pay 30 days from when you sent it. This makes the transaction legally enforceable because it is specified in a contract.

You need to properly manage accounts receivable because it affects your business’s financial health. It’s best to start with clear payment terms. Issue invoices quickly and reach out with reminders as payment dates draw close. You should also verify customers’ creditworthiness before offering credit to reduce the risk of non-payment or delays.

What is included in the cash flow statement?

Think of your cash flow statement as your business’s financial traffic report. It doesn’t gloss over anything because it accounts for every penny. As mentioned earlier, the cash flow statement is divided into three main sections: operating, investing, and financing activities.

Together, these sections reveal how cash is generated, spent, and retained, but the operating activities section is particularly relevant to accounts receivable (AR). Let’s break it down:

Below are the sections included in the cash flow statement to give you a clear snapshot of how your cash flows.

Operating activities: It tracks the money coming in and out from routine operations, such as:

• Amounts received from customers in exchange for goods or services
• Payments for inventory or raw materials made to suppliers
• Compensation for services rendered by employees
• Utilities or rent
• Tax

Note: When accounts receivable increases (e.g. more sales are made on credit), it reduces operating cash flow because the cash hasn’t been received yet. Conversely, when accounts receivable decreases (e.g. customers pay their invoices), it boosts operating cash flow by converting credit sales into actual cash.

Investing activities: This reflects your business’s long-term decisions. This section includes cash spent on or earned from investments in assets. They include:

• Equipment, vehicles, or property purchase
• Securities or equity stakes
• Proceeds from unused or old assets

Financing activities: It tracks how your business finances its operations and growth. This section comprises cash flow relating to borrowing, paying off debts, or transacting with investors. It includes:

• Loans or stock-issuing proceeds
• Payment of loans or lines of credit
• Shareholder dividend payments

Your net cash flow serves as the bottom line that tells you whether your cash reserves are increasing or decreasing. Overall, your cash flow statement helps you determine if you can cover your bills or plan your next big move.

How accounts receivable impact cash flow

Accounts receivable may look good on paper, but its value depends on how quickly you can turn it into actual cash. While extending credit to your customers can boost sales and strengthen relationships, it ties up funds that can be used in your business operations.

Accounts receivable only benefits your business when payments are made on time.. An increase in accounts receivable cash flow improves liquidity, enabling your business to cover expenses like supplier payments, wages, and rent without delays. Businesses that use efficient invoicing systems, implement clear payment terms, and follow up consistently often see positive effects on cash flow.

Delayed payments, however, can strain your finances. When customers don’t pay on time, the money you’ve already earned remains inaccessible. This can make it challenging to meet financial obligations and maintain smooth operations. If accounts receivable grows faster than cash collections, your business may look profitable on paper but struggle to pay its bills in reality.

In such cases, you might need to rely on cash reserves or take on debt, adding unnecessary pressure to your finances and limiting your ability to invest in growth.

How can international accounts receivable impact cash flow?

Managing cash flow with international accounts receivable (AR) brings unique challenges that go beyond domestic transactions. While international customers offer exciting growth opportunities, they also introduce factors that influence when and how you receive payments.

One key issue is currency fluctuations. Exchange rate changes can mean receiving less money than expected, even if the invoice amount remains unchanged. Additionally, cross-border transactions often come with processing fees and longer settlement times, delaying cash inflows and affecting your ability to cover expenses promptly.

Payment systems and local banking regulations add further complexity. Differences in banking networks and compliance requirements can slow payments, creating uncertainty around cash flow timing.

How to calculate cash flow

Calculating cash flow is easy once you break it down to its basics. Below is a step-by-step guide on how to calculate cash flow to make it easier for you.

• Determine accounting period: First, you need to figure out your accounting period. When you divide your finances into time intervals, it gives you clarity on your financial performance. It could be monthly, quarterly, or as often as you want.
• Gather financial data: Next, collect accurate data on your cash flow for the identified period. This includes inflow (money coming in) and outflow (money going out)
• Apply the cash flow formula: Use the cash flow formula (Cash Flow = Total Cash Inflows - Total Cash Outflows) to get your result. Start by adding up all the money your business spent (outflow). That includes rent, salaries, utility bills, and tax. Then, also add up all the money your business received (inflow). Finally, subtract the total outflows from the total inflows². The result is your cash flow for that period.

If the result is positive, great. It means your business is making more money than it’s spending, which is a healthy financial sign. If it’s negative, it means your business doesn’t have enough revenue to cover the cost of doing business. This means you need to rethink your budget.

How to record accounts receivable

Recording accounts receivable properly lets you keep your cash flow on track and your books accurate. It also helps you to receive payments quickly. Below are steps to get it right:

• Issue an invoice and include clear payment terms, due date, and details of the transaction
• Create an accounts receivable entry in your accounting system
• Update your records by removing the accounts receivable entry and marking the invoice as paid when a customer pays
• Use an accounts receivable aging report to keep tabs on outstanding invoices and follow up with overdue payments on time
• Record partial payments and adjust where needed
• Write off bad debts (in worse cases where the customer isn’t in the position to pay)

Following these steps helps your accounts receivable process work better while reducing errors and keeping your money moving smoothly.

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FAQs - accounts receivable cash flow

Here are some of the most commonly asked questions answered:

What is another name for accounts receivable?

You can call them receivables for short.

What’s the difference between accounts receivable and accounts payable?

They are opposite terms. Accounts receivable refer to the money customers owe your business. Accounts payable, on the other hand, is what your business owes suppliers and vendors.

Can accounts receivable be considered revenue?

Accounts receivable cannot be considered revenue in cash based accounting. Accounts receivable represents money expected to be received in the future but not yet received. However in accrual accounting it is considered revenue because in this form of accounting revenue is recorded when a sale is made, not when payment is received³.

Hence it is recorded on the balance sheet as revenue at the same time as the sale. Then when your business receives the cash is reclassified as cash and the account receivable as credit.

What role does an aging report play in managing AR?

An aging report groups unpaid invoices by their specific payment due dates. This tool shows you which invoices are overdue, letting you contact customers right away to keep your cash flowing smoothly.

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Sources used:

1. Quickbooks Intuit - Small Businesses AR report
2. BBC - Cash flow
3. Deloitte - Revenue Recognition

Sources last checked on date: 25-Jun-2025

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