Understanding accounts receivable is an essential aspect of your business’s finances and payment terms. Accounts receivable are legally enforceable claims for payment held by a company for goods supplied or services rendered that customers/clients have ordered but haven’t yet been paid for.
What are Accounts Receivable?
Accounts receivable is goods, money, or services owed to a business. The accounts receivable process doesn’t happen immediately. Instead, a company or small business will receive the goods or services after the transaction occurs. It is important for a business entity to be effective. You’ll find accounts receivable in the assets section of a balance sheet.
What is the Difference Between Accounts Receivable and Accounts Payable?
Accounts payable and accounts receivable have several differences.
Accounts Payable
- A liability.
- Considered cash outflows and credit purchases.
- Money received by a company in the future for goods or services from suppliers on credit.
- Relevant to bills payable and collectors.
Accounts Receivable
- An asset.
- Considered cash inflows and credit sales.
- Money received by a company in the future for goods or services rendered to customers on credit.
- Relevant to bills receivable and debtors.
Where Can I Find Accounts Receivable?
You can find your accounts receivable on your balance sheet. You’ll list it as a current asset on the balance sheet or a long-term asset, depending on the time in which the transaction occurred.
What are the Other Types of Receivables?
There are at least 4 types of receivables most business owners use. They are interested in receivable, nontrade receivable, notes receivable, and trade receivable.
Notes Receivable
Notes receivable, like accounts receivable, is an amount owed to a business. However, customers will sign a promissory note to provide proof of their debts. As a business owner, you can use a promissory note for legal purposes if the debt remains unpaid.
Notes receivable can either be a current asset or a long-term asset. If notes receivable are due in a year or less, it is a current asset. If notes receivable are due in more than one year, it is a long-term asset.
Other Receivables
Other receivables can be useful for your bookkeeping needs:
- Interest receivable
- Nontrade receivable
- Trade receivable
Interest Receivable
Interest receivable is the amount of interest owed to a company. Like notes receivable, interest receivable is an asset on a balance sheet.
Interest receivable payments aren’t payments that a company has received. However, they are due at a later date. Recording interest receivable on your financial statements can help you determine the amount of interest owed to you.
Trade Receivables
Trade receivables are amounts owed for goods and services, which include both accounts receivable and notes receivable. Nontrade receivables are amounts outside of business transactions that comprise:
- Advances to employees
- Claims for losses or damages
- Dividends
- Interest receivable
How to Effectively Manage Account Receivable
Managing accounts receivable is crucial for the financial health of any business. Here are some effective tips for managing accounts receivable:
Establish Clear Payment Terms
Clearly communicate your payment terms to your customers upfront, including the due date, late fees, and any discounts for early payment. This helps set expectations and encourages timely payments.
Monitor Aging Reports
Keep track of your accounts receivable aging reports, which provide an overview of outstanding invoices and their aging status. This helps you identify overdue invoices and take appropriate actions, such as sending reminders or contacting customers for payment.
Invoice Promptly and Accurately
Send invoices promptly and ensure they are accurate and complete. Include all relevant details such as product or service description, quantity, price, and payment terms. Clear and accurate invoices help avoid disputes and delays in payment.
Offer Convenient Payment Options
Provide multiple payment options to make it easy for customers to pay, such as online payments, credit card payments, and electronic fund transfers. This enhances customer convenience and speeds up the payment process.
Follow Up on Overdue Invoices
If invoices become overdue, follow up promptly with reminders and inquiries about the payment status. Be professional and persistent in your communication, while maintaining good customer relationships.
Implement Credit Policies
Have clear credit policies in place, including credit limits, credit checks, and credit terms. Regularly review and update your credit policies to minimize the risk of late or non-payments.
Train Your Sales Team
Educate your sales team on the importance of timely payments and the impact on cash flow. Encourage them to communicate any potential payment issues or delays from customers so that appropriate actions can be taken proactively.
Utilize Technology
Leverage accounting software or a dedicated accounts receivable management system to streamline and automate the invoicing, payment tracking, and reporting processes. This can save time and improve efficiency in managing accounts receivable.
Why is Account Receivable Crucial for Business Success
Accounts receivable, also known as outstanding invoices or unpaid sales, play a crucial role in the success of a business. Here are some key reasons why accounts receivable management is essential.
Cash Flow Optimization
Accounts receivables represent the money that a business is owed by customers for goods or services rendered. Effectively managing accounts receivables ensures the timely collection of payments, which in turn improves cash flow. This allows a business to meet its financial obligations, such as paying bills, employees, and suppliers, and investing in growth opportunities.
Working Capital Management
Accounts receivable are considered assets on a business's balance sheet, and they can be used as collateral to secure loans or attract potential investors. Proper management of accounts receivable ensures that the business has sufficient working capital to operate smoothly, invest in new ventures, and expand operations.
Relationship with Customers
Maintaining a positive relationship with customers is crucial for business success. By managing accounts receivables effectively, a business can establish clear payment terms, provide accurate and timely invoices, and offer convenient payment options. This helps build trust and loyalty among customers, leading to repeat business and positive referrals.
Risk Mitigation
Accounts receivable management involves assessing the creditworthiness of customers, setting credit limits, and implementing credit policies. This helps a business mitigate the risk of bad debts and financial losses due to customers defaulting on payments or going bankrupt. Additionally, proper credit management can also help identify potential collection issues early on and take appropriate actions to minimize losses
Business Performance Analysis
Accounts receivable management involves monitoring aging reports, tracking payment trends, and analyzing customer payment behaviors. This data provides valuable insights into the financial health of the business, helps identify areas of improvement, and supports informed decision-making for pricing, credit policies, and customer relationship management.
Effective management of accounts receivables is crucial for a business's success as it optimizes cash flow, supports working capital management
Work with Professional
As a business owner, partnering with a professional accounting service such as Bookkeeping Pro Services can greatly benefit your accounts receivable management. Our expertise in financial management, along with our efficient systems and processes, can help ensure that your accounts receivables are effectively managed.
With our assistance, you can establish clear payment terms, monitor aging reports, invoice promptly and accurately, offer convenient payment options, follow up on overdue invoices, implement credit policies, train your sales team, and utilize technology to streamline the entire process. By working with Bookkeeping Pro Services, you can optimize your accounts receivable management, improve cash flow, and achieve financial success for your business.
Useful resources
What is Accounts Payable? Why is Account Payable (AP) Important?
Bookkeeping Terminology: 35 Common Bookkeeping Terms
