Accounts receivable (AR) is the technical accounting term with a fairly simple explanation. They are the purchases made by customers on credit. All the purchases that you have made and invoiced for, but are yet to be paid off by the customers come under AR. Whether the business sells goods or offers services, there are always buyers who purchase on credit and would be paying later. Until the credit is paid, their accounts are listed in the AR. A balance sheet is maintained for the same purpose too. Unfinished payments can cause hindrance in your further investments and aren’t good for the business. It is viewed as a current asset and falls under liabilities on the balance sheet.
Why is it important?
The funds that you get through your accounts receivable process are one of the driving forces for your business. It is important to maintain a balance sheet with records of the AR. Uncollected payments affect the profitability of your business. If you do not have a properly maintained record of the same, you are likely to lose the payment amount in the future. In such cases, you might end up giving products or services away for free causing harm to the business finances in the longer run. AR makes up a part of the company’s cash flow.
Is it a good idea to have accounts receivable for your business?
The option for paying via credit is offered to customers for smoother transactions and is used as a promotional strategy too. If handled well, it can be equally beneficial to both customers and the owner alike. Many-a-times, the service is started as a response to growing competition in the field. If you want to stay on top of other similar businesses, services that are easier for the customers have to be considered. As a small business owner too, this can be quite simply managed with the right means and techniques.
How to manage accounts receivable?
Consistent maintenance of records and updating the balance sheet is the best and rather the only way to stay on top of your AR. As a small business owner, you might not have an extensive workforce or the latest technologies to manage it so being proactive is your only ally.
- Credits are convenient to customers so they are likely to forget about them. It is your task to remind your customers of their credit after a decided interval of time. A good interval is 15 days.
- You could arrange a system of automated reminders as well that would send a message to their numbers and email ids after 15 days to remind them to complete the payment. There is dedicated software for this purpose that you can purchase from the market to help you in maintaining records.
- Make sure everything is documented. Customers are likely to postpone payments for various reasons. Business owners need to document this in their records to make sure every payment or the lack thereof is accounted for.
- Maintain a strong management system with people specially assigned to this task. Check the invoices regularly and make changes if and when required based on the payments completed. At the end of every day tally your accounts payable with your accounts receivable to make sure you’re on track with the collections.
- Upon completion of the payment, prepare a confirmatory receipt or invoice for the customer as well.
- To ensure timely collection, you could offer discounts for early payment of dues. This works as a positive reinforcement for customers to clear their credit.
What happens if the dues are not paid?
If a customer does not pay the pending amount, as a one-time incident, it can be written off as bad debt. To ensure a similar situation does not happen again, you could deny further services or purchases to that customer until the pending credit is cleared.
It is important to remember that a lot of small businesses fall due to the lack of strong policies and orderly management methods when it comes to business financess. Along with maintaining a top-notch quality for your services or products, the practical and financial aspect of business also needs to be flawless.