For new business owners, Accounts Receivables is one of the most crucial asset accounts that they possess as it is directly tied into how their business receives its earnings. A receivable is a monetary claim you have against other people or businesses and is typically increased when you make a sale or provide services on credit. In other words, you allow them to pay you at a later date for goods and services you provide now, such as if you cut someone’s lawn today and they pay you at the end of the month.
If you don’t get paid you won’t be able to keep your business running, so it's important that you know how to keep track of your receivables and collect as soon as possible. You’ll also need to know how to deal with being unable to collect for one reason or another, because even the most successful businesses run into that problem. Here are two quick tips on how to account for your receivables:
Determine How Fast You Collect Already
To begin with, you’ll need to establish how long your clients have gone without paying their receivables and how often you converted those who did pay into cash over the last financial period or so. This boils down to two particular ratios: Accounts Receivable Turnover and Number of Days’ Sales in Receivables.
The Accounts Receivable Turnover is the rate at which you turn receivables into cash for your business. The Number of Days’ Sale in Receivable is the length of time the receivables have gone unpaid. Both of these are relatively simply to figure out, but they require some additional information to calculate properly—average accounts receivable amounts, average daily sales, etc. The information they provide can help you determine just how well you’ve been collecting and turning your receivables into cash so far, which can determine how you act going forward.
While the ideal ratios depend on the industry in question, as each industry has a different baseline, the general rule of thumb is that higher turnover means the faster you’re turning them into cash, and the lower your number of days means the faster that people are paying the claim you have against them. If the numbers don’t look too good, then you’ll need to start making plans on how to improve the situation.
Aging Accounts Receivables and Allowances
Once you have an idea on the above two ratios, you need to consider getting payment from those who are overdue. Working under the assumption that the longer a receivable remains outstanding, the less likely you’ll be able to collect it, an Accounts Receivable Aging Report will be your best friend. This report will not only list all the outstanding receivables but break them down based on how long they’ve gone uncollected by category and factors like the industry average. It will give you a good guideline on who might need a gentle reminder about the debt as it’s entirely possible that they may have forgotten or thought they paid it already.
In the event someone cannot pay the full value, you may need to make arrangements so that they can pay a lower amount over time. It may take a little longer, but its better than the worst-case scenario of not being able to collect a receivable at all. Because at that point you’ll probably have to write-off the loss as an expense, and too many of those can sink your business entirely.
And with that you have two quick tips on dealing with Accounts Receivables. Not all businesses have a heavy focus on this particular asset, but for those that do remember to stay on top of them. If you can’t manage that due to time constraints or some other reason, then feel free to Contact Us and inquire about how we can help move your books from the red into the black.
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