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Contractor glossary

Accounts receivable

Updated

Definition

Accounts receivable (AR) is the total your customers owe you for work you've done and invoiced but haven't been paid for yet. It's money you've earned but can't spend, which is why a busy month can still leave you short on cash.

Also called: AR, A/R, Receivables

What counts, and what doesn't

An invoice becomes a receivable the day you send it and stops being one when it's paid in full. Your AR is the sum of every open balance, including:

  • Service calls and jobs billed on terms such as net 15 or net 30
  • Progress invoices and final balances on larger jobs
  • Retainage a general contractor is holding until the project is done
  • On insurance roofs, the final balance that waits on the insurer releasing recoverable depreciation

Two things look like receivables but aren't:

  • Finished work you haven't invoiced. Until the invoice goes out, the customer has nothing to pay and the job won't appear on any list of money owed. Invoice the day the work is done.
  • Deposits you've collected. That's money you've taken in for work you still owe, the opposite of a receivable.

Aging buckets

An aging report sorts open invoices by how long they've been past due, usually in 30-day buckets. Check whether yours counts from the invoice date or the due date; the same invoice can land in different buckets.

Bucket What to do
Current (not yet due) Let your reminder schedule run
1 to 30 days past due Reminders, then a phone call
31 to 60 days Call, fix what's wrong, agree on a date or a written plan
61 to 90 days Final notice under your written terms
Over 90 days Collection steps or a write-off decision

Treat an older balance as a sign that something is wrong, not just slow: a dispute, a customer short on cash, a missing PO number. Lien and notice deadlines are set by state law and don't wait for your aging report, so check them when you sign the job. See mechanic's lien.

Why it matters for cash flow

Payroll, fuel and supplier bills come out of the bank account, not your receivables, so the faster invoices turn into cash, the less cash it takes to run the same amount of work.

Example: A two-truck plumbing shop bills $60,000 a month, about $2,000 a day. If customers pay 10 days after the invoice on average, roughly $20,000 sits in receivables at any time. If that stretches to 30 days, it's about $60,000: the same jobs and the same profit, but $40,000 less in the bank for payroll and supplier bills. The numbers are made up for illustration.

On accrual books, revenue counts when you earn it, not when you're paid, so a growing AR balance can make your profit and loss statement look healthy while the bank account runs dry. Days sales outstanding (DSO) turns AR into one number to track: AR ÷ revenue billed in the period × days in the period. How to get paid faster works through it.

Common mistakes

  • Counting AR as cash. Plan purchases and hiring around money in the bank, not money owed.
  • Chasing a dispute with reminders. A customer unhappy with the work needs a call and a fix, so pause reminders on that invoice until it's settled.
  • Ignoring small leftovers. A short payment or an unpaid trip charge is easy to let slide; dozens add up.
  • Losing track of conditional balances. Retainage and insurance holdbacks are paid when a condition is met, not on a date, so give each one its own follow-up date.
  • Never deciding when to stop. Set the point where you hand an account to collections or write it off, and ask your CPA how a write-off is handled under your accounting method.

How it connects

Payment terms decide when an invoice moves from current to past due, and progress billing keeps a large job from piling up one big receivable at the end. Cash flow is the other side of the same timing gap. For balances that stall, how to collect overdue invoices covers the next steps.

Go deeper

GuideHow to Get Paid Faster as a ContractorHow contractors get paid sooner: payment terms set at booking, invoices sent the day the job ends, pay links, deposits, progress billing and reminders.GuideHow to Collect Overdue InvoicesA contractor's plan for past-due invoices: a reminder schedule, a call script, payment plans, a final notice letter, late fees, liens and small claims.GuideHow to Read a Profit and Loss Statement for ContractorsRead a contractor P&L line by line: revenue, job costs, gross margin, overhead and net profit, plus cash vs accrual and a 30-minute monthly review.
Cash flowCash flow is the money moving into and out of your business, and when it moves. Profit tells you whether your work makes money; cash flow tells you whether the money is in the bank when payroll, suppliers and taxes come due.Payment termsPayment terms are the conditions on your estimate, contract and invoice that say when payment is due, how the customer can pay and what happens if they pay late. Common terms include due at completion, due on receipt, net 15 and net 30.Progress billingProgress billing is invoicing a job in stages as the work is completed, instead of sending one invoice at the end. Each invoice bills the part of the contract earned so far, either for reaching agreed milestones or by percent complete against a schedule of values.RetainageRetainage is a set percentage of each progress payment that the customer or general contractor holds back until the work is complete, as security that the job gets finished and corrected. It's money you've earned but get paid later, usually at closeout.Mechanic's lienA mechanic's lien is a legal claim against real property, filed by a contractor, subcontractor or supplier who wasn't paid for work or materials that improved it. Who qualifies, the notices required and the deadlines to record and enforce it are set by each state's law.Profit and loss statementA profit and loss statement (P&L), also called an income statement, reports a business's revenue, costs and profit over a period such as a month, quarter or year. It shows whether the work you did made money, not how much cash you have.

See every term in the glossary