Accounts Receivable—What is That?

Accounts receivable is the amount of money owed to a business for sales of goods or services on account (on credit) and it represents an amount of cash that will be received at a near-future date. This category of current assets is typically among the largest assets on a company’s balance sheet. Cash flow is frequently described as the “lifeblood of a business” and accounts receivable can aptly be called a key part of the “blood flow.”

Why are Accounts Receivable Important?

The proper handling of accounts receivable provides these business benefits:

  • It contributes to healthy cash flow, turning commitments into real cash. And, if companies can secure receivables faster than processing payables, positive working capital results, leading to the opportunity to purchase more materials for sellable inventory.
  • Allowing customers to purchase on credit opens the opportunity for increased sales and leads to both goodwill and improved customer loyalty.
  • Well-maintained customer credit files will help a company to extend credit to good customers and work on problem credit customers. This also contributes to deterring bad debt.
  • Good accounts receivable documentation provides information that can contribute to the formulation of more successful sales and marketing strategies.

How Do Accountants Handle Accounts Receivable?

Accounts receivable starts with an invoicing process leading to the generation of income. Then accounting entries are made showing the transaction. When the revenue is received, the accounting function makes the income entry into their system and submits the deposit to the bank. An important accounting function is to keep track of outstanding invoices and to age them for further examination. Also, bad debts must be recorded as a write-off to bad debt expenses.

How to Successfully Manage Accounts Receivable

Here are useful suggestions to manage accounts receivable successfully:

  1. Create and cultivate good and healthy relationships with each customer.
  2. Develop a professional credit application for use by all credit-seeking customers. When creditworthiness is established, have customers sign a contract for purchases.
  3. Establish realistic payment plans and set credit limits.
  4. Provide a good choice of payment methods.
  5. Establish clear (and solid) billing policies for the company. This should include the number of days in which the invoice is due and any fees due if the account is not paid in full by the deadline. It may also be appropriate to require a deposit from new customers before delivery.
  6. Invoice all purchases promptly.
  7. Review the accounts receivable report frequently and take appropriate action including any follow-up email reminders or phone calls.
  8. Process accounts receivable electronically, suggesting that the bill is “due upon receipt” making possible shorter payment due dates. Another approach is to offer a discount if the invoice is paid early.
  9. Have a plan in place regarding when to involve a collection agency.
  10. Always be professional and treat each customer with respect.

Accounts Receivable Mistakes to Avoid

Keep the cash flowing in a positive way by avoiding these accounts receivable mistakes:

  • Overlooking or being overly optimistic about a customer’s credit profile.
  • Having a too lax credit policy.
  • Letting overdue invoices go unchecked and uncorrected.
  • Only allowing checks. (Providing more payment avenues leads to more successful collections.)
  • Not complying with local debt collection laws.
  • Not hiring professional collection help when it is needed.

Get Expert Accounting and Financial Assistance That You Can Rely On

Contact Doerhoff & Associates, CPA, based in Jefferson City, MO for professional accounting and financial assistance that you can count on. Doerhoff & Associates has one goal in mind, to provide comprehensive business accounting services designed specifically for your success.