What is Account Receivable?
Account receivable is all the sales you have done and products that are delivered by you, but you haven’t get paid for that. It is a record of all the pending payments you have delivered your services for.
Usually when businesses do financial analysis, they consider revenue, earnings, share and net income. Although analysing a business profits and revenues must include account payable and receivable as well. In this blog, we will discuss about account receivable, their importance and how to analyse them.
So, without any further ado, lets simply dive in:
Why it is important?
Account receivable in one hand is a good thing, as it shows that business was able to sell its service and products. It simply indicates that business was able to obtain orders and was successful in delivering them. It also gives a sense of relief that, definite fund is going to come in the future.
If you think about it, they are assets. Most of the accountants view this as assets, and is considered to be valuable for business. They are like future assets that can be funded whenever needed. It ensure guaranteed funds in the time when needed the most.
But in order for account receivable to become an asset, the receivable must be ensure to be converting into cash in time. otherwise, all it will feel like is money is going out.
Too much cash receivable on your balance sheet only means troubled cash flow, therefore, in order for account receivable to become asset we need to clear them on time. There is a need to ensure that receivable account are be converted into cash.
Therefore, there a special accounts department in every organisation whose job is to make list of clients and sort them according to the likelihood of their capability of bills to be paid. They make sure that bills are made as soon as possible.
As we can see this non-payment thing is a risk for business, but why do businesses still carry on providing services and product without any advance payment?
When a business allow customers to buy service/ products on credit, they can benefit more. People are not obligated to pay upfront and hence they feel more confident in buying.
This is an effective way to encouraging people to buy services/product. But this is effective only with reliable customers. Loads of amount receivables in the hands of unreliable customers can be problematic.
How to analyse Account receivable?
In short, how to take charge of your business. Account receivable plays important role in your business finances. It has got “ it can either make it or break it” power in your business. Therefore, we need to have deeper understanding of account receivable. In order to foster a profitable business.
- Account receivable-to-sales ratio
There are several methods developed by analysts to utilise benefits of account receivable to the fullest.
One of the easiest method is: account receivable-to-sales ratio. This is obtained by dividing account receivable’s amount by its sales. This allows you to determine the extent to which business’s sale is not being paid. The higher the number, the more receipts are due.
ii) To monitor bad debts of business
Every business have their own share of bad debts. One way to analyse whether account receivable is doing good to your business or not is to check the balance sheet. Determine the nature of bad debt and how it has changed over time. If your bad debts have gotten worse, chances are your account receivable is not an asset to your business anymore.
iii) Study financial statements
Financial Statement will contain list of customers and their due payments. Studying financial statement can give you information regarding customers with outstanding debts and you can target them. You can analyse credit-worthiness of your customers and make future decision accordingly. Even though this bring accurate insights but it is time-consuming.
iv) Determining the extend of over-due
This method of analysis will investigate the degree to which customers have their over dues. This analysis will help you to determine if problems with particular customers have remained longer. This can help you to find out loyal customers and problematic customers.
In the bottom:
Although every analyst have their own method of analysing account receivable, but they all agree in one point that, maintenance of account receivable determine whether it will be as a asset for your company or simple a liability.
Therefore, analysis of account receivable is critical for your business.Tags: accounting, accounts, administration, assets, essential business concepts, invoicing, late payments, payments, revenue, small business accounting