What is Accounts Receivable? Accounts receivable are the monies your business is due for items sold on credit. This is a brief discussion of three important aspects of your accounts receivable: customer credit; accounts receivable aging report; and overdue accounts.
You have two basic ways to collect on a sale you make: cash payment; which can take the form of cash, a cheque, debit or credit card payment, or issue an invoice. An invoice is a bill for later payment by pre-agreed terms, typically due within 30 days of receipt of goods. Your record of outstanding invoices is your accounts receivable.
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You should not agree to invoice a customer for goods delivered if you haven’t assured yourself that they have a record of paying their bills. If they aren’t a close friend or relative you must have them complete a credit application.
A credit application usually consists of four parts: the applicants’ address and contact information; their bank account and bank contact information; three references from businesses they already have credit with; and the terms upon which you are prepared to offer them credit. In some circumstances you may include a requirement for a personal guarantee by the principal(s) of the business applying for credit.
Google “generic credit application form” and you will find a list of credit application forms you can customize for your purposes.
Accounts Receivable Aging Report
As we discussed earlier, credit advanced to a customer is on an agreed set of terms. Typically customers agree to pay within 30 days. Now, in most circumstances, you can reasonably expect payment on the bulk of your receivables between 30 and 50 days.
Your accounting software will provide you a report calculated on a daily basis called an Accounts Receivable Aging Report. On it will be a list of all your accounts receivable, the customer and the invoice number. The receivables will usually be categorized across 4 columns: current to 30 days, 31-60 days, 61-90 days, 91+ outstanding.
Your business depends on its cash flow. You or a delegate must have a system in place where accounts that are older than 45-60 days are regularly addressed – by email, or a phone call. In some cases, it is appropriate to inform their sales rep and have them gently address the issue.
In most circumstances if an account receivable passes 90 days outstanding, there’s trouble: trouble for you because your banker is unlikely to consider a receivable that old as an asset; and trouble for your business because now you have to dedicate resources to collecting that money. Trouble too for your business because what may have been a regular customer is now proving a liability. You must seriously review their account and your level of comfort around extending them any more credit.
On the bright side, if you have had a relationship with customers whose accounts have rolled over 90 days, it’s likely that you will be able to work out repayment terms with them. It generally takes some creativity to work through the process but it doesn’t mean you can’t continue to do business. Sometimes well meaning individuals running good businesses run into unforeseen issues that squeeze their cash flow. Working with them during these tough times usually results in a very loyal customer when things get back on track.
On the dark side, in a small percentage of situations, a viable organization decides for whatever reason not to pay their bill. In spite of your best efforts you are unable to persuade them. In these situations there are professional collections companies that you can turn to. For a percentage of the outstanding value they will take on the responsibility of collection. At this point there is a good argument to be made to retain their services.
On occasion though, a business is in too much trouble to meet its obligations and you won’t see your money. It is for these reasons that you keep your credit applications current, pursue your due diligence in their evaluation, and never extend more credit than you can afford to lose.
What is Accounts Receivable? Accounts receivable is your list of businesses you’ve extended credit to. For most businesses outside of retail, they represent your cash flow, the life blood of your business. It is critical that you review the customers you offer credit carefully and that you stay on top of what is happening with them. Any unusual activity, a jump in orders, or a dramatic decrease, or a change in payment patterns should serve notice that you should review their account. Be courteous with your customers, be creative, but always be wary.