One of the most important categories on a company’s ledger is accounts receivable. It represents money that is owed to a business by various clients and other entities for sales or products that were provided on credit.
The Basics Of Accounts Receivable
In most entities, accounts receivable is carried out by creating an invoice that is mailed or delivered electronically to the customer, who must pay it within a set time as outlined by the payment or credit terms.
Accounts receivable uses a sales ledger to record sales the business has made, the amount of money that has been received for services or goods, and the amount of money that is owed at the end of each month. The accounts receivable team is tasked with tracking and receiving funds on behalf of the company and applying it to current pending balances.
To illustrate accounts receivable, consider the example of a water company that bills its clients based on their water consumption.
The water company records an accounts receivable for the unpaid invoice while waiting for the customer to pay the water bill. This is an example of a business that routinely offers its clients the ability to pay for a service after receiving it.
In some cases, however, companies operate by allowing only some of their sales to be on credit. For example, they may give special or frequent customers periodic invoices, enabling them to avoid the hassle of having to make physical payments as each transaction takes place.
Manage Lines Of Credit
Accounts receivable essentially represents a line of credit that is extended by a company, and payments are typically due within a time frame ranging from a few days to a year. Accounts receivable teams are responsible for tracking the money owed.
Offering lines of credit to clients can allow your company to make more sales in larger volumes to buyers who are not prepared to pay in cash up front.
With favorable credit terms, you can encourage buyers to make their purchases from you when needed rather than waiting until they have the money. However, it is important not to be too generous with credit because it could result in an excessive amount of bad debt write-offs in the future.
Improve Cash Flow
To improve the cash flow of your business, it is important to establish a solid process for collecting payments from customers.
Timely payments are important to ensure that enough cash is kept on hand to keep up with current expenses, such as payroll, utilities, rent, restocking inventory, office supplies, and financial emergencies. To that end, some companies offer a small discount for faster payments or for paying in cash.
Collect Outstanding Invoices
Collecting outstanding invoices can be difficult, but there are a few strategies that can be employed to help. The first step is reaching out to customers to find out why they have not paid their bill.
In some cases, they may have simply lost or overlooked it and can pay right away. Others may need to work out a payment plan. In some cases, you may find that the client can pay if you provide alternative payment options.
Having a good collection policy can help encourage timely payment. A good collection policy should include details about any fees and interest costs that the customer will accrue for past due balances and ensure that they are aware of these fees.
This can go a long way toward preventing missed payments in the future. It may also be helpful to send your customers gentle reminders that the money is due using several different channels of communication.
The Fewer, The Better
Generally speaking, having a lower accounts receivable balance is better than a higher one because this indicates that your customers pay fast and you are not owed a significant amount of money.
However, it is not unusual for the accounts receivable balance to grow as a company starts to gain customers and make more sales. In these cases, it may be useful to track the accounts receivable turnover ratio to ensure that the percentage of accounts receivable stays relatively constant compared to sales.
What Type Of Account Is Accounts Receivable?
On a balance sheet, accounts receivables are listed as current assets in the amount of money owed by customers for any purchases made on credit.
How Is Accounts Receivable Different From Accounts Payable?
Accounts receivable is the opposite of accounts payable. When a business owes debts to its suppliers or any other party, those are considered accounts payable.
These amounts will be recorded in the accounts payable column of their business’s balance sheet; the same amount will be considered accounts receivable by the businesses who are owed the money.
What Are The Benefits Of Accounts Receivable?
Because accounts receivable is considered a current asset, it is a measure of a business’s liquidity and its ability to cover its short-term obligations without bringing in additional cash.