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Accounts Receivable

Accounts receivable are a company’s outstanding invoices or money owed by its customers.

A simple way to define accounts receivables is to say they are a company’s sales that haven’t been paid for by their customers yet.  It’s a kind of credit that companies extend to clients and payments are usually due within a few days to a year.  Essentially, the company accepts an IOU from the customer in good faith that they will be paid.

Accounts receivable are usually considered an asset on a company’s balance sheet because the customer is legally obligated to pay the debt.

Recording and tracking receivables has seen huge advances with the widespread implementation of cloud (online) invoice delivery and easy payment processing.

Business can now be paid faster with minimal to no processing expenses and can be paid in advance by setting-up automatic recurring billing.  This has essentially made it possible for businesses to stop chasing their clients for money; they’ve automated the process instead.

With free ACH and very low credit card processing fees, clients conveniently pay with credit cards and are often happy to earn points and rewards while being allowed additional days to pay the balance. It also means fewer trips to the bank and much easier receivables controls for business owners.

It almost sounds too good to be true, but it isn’t; Sherman Oaks Accounting & Bookkeeping powered by One Source Services can set it up.

Many companies allow some sales to be on credit, often frequent customers who are invoiced periodically, to avoid the customer inconvenience of paying each time a transaction occurs.

Some businesses offer all of their clients the ability to pay for services after they are rendered. Most utility companies for instance, such as gas or power, bill their clients after gas or electricity has been provided. While these companies wait for people to pay their bills, the unpaid invoices are called accounts receivable.

Accounts receivable are the opposite of accounts payable. Accounts payable are debts that a company owes to their suppliers and vendors, whereas accounts receivable are debts owed to the company by their customers.

When accounts receivable fall past due and a company is unable to collect on them, a company might choose to take the customer to court over the unpaid debt. Some companies choose to hire a third-party bill collector, instead. Other companies sell their accounts receivable for pennies on the dollar to a third-party that collects the debt.

A “bad debt” occurs when a business does not receive payment on accounts receivable previously reported as income. Businesses are allowed to deduct bad debts on tax returns if the debt was reported as income on a previous return.

If you’re uncertain about which collections option might be best for your business, then Sherman Oaks Accounting & Bookkeeping could review your A/R situation and offer advice. Perhaps even assist with collections.

There is a report that summarizes the total receivables currently due and those that are past due, typically organized in 30-day increments. It is an excellent gauge of the financial health of a company’s customers. When the Accounts Receivable Aging Report exposes that receivables are being collected slower than usual, it could be a warning that business may be slowing down or an indication that a company may be taking too much credit risk in its sales practices. The report is also great for ascertaining which customers are (or are not) good credit risks. Additionally, it provides useful data to review when a company is deciding whether or not to keep doing business with chronically late paying customers or perhaps put them on a cash-only basis.

“Net” receivables often come up when discussing accounts receivable. They are the total money owed to a company by its customers, minus the money that will likely never be paid. Net receivables are usually expressed as a percentage with a higher percentage indicating that a business has a greater ability to collect. For instance, if a company estimates that 5% of its sales are never going to be collected, then its net receivables would be 95% of their accounts receivable.

This is a great way to check on how effective a company’s collection process is and can be used for cash flow planning. On the balance sheet, net receivables are shown as an aggregated total and classified as a current asset.  The gross receivables are listed first, followed by the allowance for accounts that will probably not be collected.

There is a special type of financing called “accounts receivable financing” in which a company uses its receivables as collateral in a financing agreement. In this agreement, an accounts receivables financier would give the company an amount for their receivables at a reduced value.

Accounts receivable financing may help some companies free-up capital stuck in unpaid debts. Plus, it transfers the default risk of unpaid accounts receivable to the financing company taking them over.

Sherman Oaks Accounting & Bookkeeping powered by One Source Services can help if you would like to explore or obtain accounts receivable financing.

It is very important for a company to track their accounts receivable.  Factors such as aging and net receivables are tools that business owners should use to analyze the financial health of their company and help them make more informed, proactive business decisions.