Accounts receivable

We can get a clue about the role of accounts receivable in creating a lack of cash flow when we consider the meaning of the term. An account receivable is a promise from a customer that you will be paid for the goods or services you provided. But you don’t have the money yet; you’ll get it, hopefully, some day in the future.

Meanwhile, as was the case with inventory, you had to pay all your expenses, with your cash, every day. Until you actually get payments from your customers, you’ll be cash poor.

Let’s determine how valuable these accounts receivable are to your cash position. We’ll do a calculation similar to the one we did for inventory. And once again, we’ll use one item from the income statement, revenues, and one item from the balance sheet, accounts receivable.