Account receivables showing there on balance sheets clearly should be interpreted as the amount the company is assured of being paid by its liable customers at a particular date in the near future. But it’s not guaranteed that the company will be paid a certain amount in the future, it surely depends on its customer’s reliability, trust, and their financial backup.
What do we understand by Accounts Receivables?
In any firm balance sheet, the accounts receivable column depicts the money it is owed by its customers in exchange for any goods or services rendered. Suppose ABC Company agrees to make the sale of $1000 worth products to its customer XYZ on net 90terms. It means the customer has 90days from that day to pay the amount of $1000 to the seller of the product. The accounting transactions passed when sales made are as follows: ABC Company records the sale of $1000 as a receivable debiting its account receivable account. This entry shows that the amount here is classified as the revenue to the firm at the moment the sale happened, rather than when the cash is in real received, a $1000 credit is also made to the revenue account on the balance sheet which balances the entry. Hopefully, when the customer actually pays within the set 90 days, ABC Company reclassifies the amount of $1000 as cash on its balance sheet by making a transaction. Debiting the cash account and crediting the accounts receivable account means the customer’s account.
Cash, account receivables are assets and more specifically they are current assets which means can easily be converted into cash within a quick time. An asset is considered as a valuable thing that in future is surely going to benefit the company. Account receivables are considered valuable because soon they will be converted into liquid means cash it represents money amount owed to a company by its customers. When a firm is having high levels of account receivables, it signifies simply that it will be flush with cash at a defined date in the near future.
Receivables play a significant role in making your business higher. Even Small business Accounts Receivables can turn business upside down. It should be given proper consideration and the amount should be collected in time for the proper running of the business.
Why do you need Accounts Receivable Consulting services?
You can take help of Accounts receivables consulting services to understand how to increase cash flow and how to keep the customer with you for a long time. Accounts receivable management services has professionals who are experienced in improving customer relation with reducing bad debts.
No. of benefits that you start to observe:
- It improves your cash position
- Increase in the efficiency of accounts receivable
- It cuts excessive administration costs
- Improvement could be noticed in customer service and satisfaction
- It works effectively in minimizing the given credit risk by making sure debtors pay before or at the defined date
- Control over working capital and shorten the length of sale to payment cycle
The reason behind the maintenance of provision for doubtful debts:
Although a company can never guarantee the amount will be received for sure by its customers. There are various reasons behind this; sometimes customers neglect to pay the money they owe at times. Take an example- suppose that the customer Mr. A went bankrupt after its purchase from ABC Company before clearing the amount of bill. And even if the customer is bounded to pay legally he/she cannot do if he/she doesn’t have the amount with him/her. That’s why an allowance for doubtful debts is prepared by the company whom they doubt to collect money from.
Is it a good sign to have high levels of accounts receivable in the balance sheet?
- Just because account receivables are considered as assets doesn’t mean that high levels of them sign good news. When a company is noticed with high levels of accounts receivables in relation to its cash in hand, this dictates lax business practices in collecting its amount of debt. Nor too high nor too low is good.
- Low levels of receivables also is a concerning matter, it means that the company finance department isn’t competitive with its terms.
Another thing on the balance sheet that is Provision or allowance for doubtful debts should also be in the check. A high rise in this account indicates that the company is easily trusting and giving credit to riskier customers. This information is quite important because it shows the condition of our account receivables doubtful customers.
Ways to get your money on time:
Send weekly or monthly reminder letters about the past due to balances to customers.
- Suggest them to pay in installments as upon their suitability. Its much better option, even you will get something out of them instead of nothing at all.
- Make phone calls to your past due to customers
- Hire a collection company. Only consider doing this method with your over 6month past due customers.