What Accounts Receivable?

How Does Accounts Receivable Work?

When a business sells products or services to a customer, it may offer credit terms, allowing the customer to pay at a later date. This process creates an accounts receivable balance on the business’s financial statements. 

The terms often specify when payments are due, such as within 15 days, 30 days, or 60 days, depending on the agreement between the business and the customer. During this period of time, the business tracks its accounts receivable balances, ensuring that customer payments are collected in line with the agreed payment terms.

Companies rely on their accounts receivable to maintain steady cash flows and support their working capital needs. For example, if payments are delayed beyond the due date, it can negatively impact cash flows, leading to potential challenges in meeting short-term obligations.

‍

What Are Examples Of Accounts Receivable: 

Here are a few practical examples of how accounts receivable works:

1. Product Sales on Credit: A technology company sells $10,000 worth of goods to a customer, allowing the customer to pay within 30 days. The $10,000 becomes part of the company’s accounts receivable until the customer pays.
2. Service Invoicing: A consulting firm provides services worth $5,000 to a client and issues an invoice with 60-day payment terms. The $5,000 is counted as accounts receivable until payment is made.
3. Late Payments: If a client doesn’t pay their $2,000 invoice within the agreed 30 days, the business will still list the amount as part of accounts receivable but might also need to take steps to collect payments

‍

The Difference Between Accounts Receivable And Accounts Payable 

While accounts receivable refers to the money a business expects to receive, accounts payable is the money the company owes to its suppliers for products or services received. Both play important roles in managing cash flow but have opposite effects on the balance sheet. Accounts receivable are assets, whereas accounts payable are liabilities. Balancing these two elements is essential as part of  healthy financial management.

‍

What Are The Types Of Accounts Receivable? 

There are various types of accounts receivable. This includes any invoices for goods and services the business provides to a customer without payment at the time of reporting. The payment of the invoice is expected on a date in the future (typically in 60 days or less). Here are the different types of accounts receivable:

‍

Best Practices When Dealing With Accounts Receivable And Finances 

Establishing strict measures to manage accounts receivable and finances is critical to improve cash flow, minimize bad debt, and strengthen your business’s financial health. Here are a few best practices to follow: 

1. Set Clear Payment Terms: Define payment due dates and penalties upfront.
2. Automate Invoicing: Use software such as invoicing software, automated reminders, and payment processing software to streamline invoice generation and tracking.
3. Review Receivables Regularly: Monitor overdue accounts and aging balances.
4. Implement a Collection Policy: Have a process for handling late payments.
5. Offer Multiple Payment Methods: Make it easy for customers to pay.
6. Check Customer Credit: Evaluate creditworthiness before extending credit.
7. Provide Early Payment Incentives: Encourage quicker payments with discounts.
8. Track Key Metrics: Monitor days sales outstanding (DSO) to improve collections.
9. Separate Financial Duties: Ensure different roles handle billing and payment processing.
10. Reserve for Bad Debt: Set aside funds for uncollected receivables.

‍

Managing the accounts receivable process is crucial for ensuring strong cash flow, minimizing the risk of bad debt, and maintaining healthy net working capital. Playroll’s solution for finance teams, helps businesses streamline their financial operations, including simplifying global payroll, payment processes, and compliance management. Book a chat with one of our experts to find out how we can help you consolidate your operations.

‍