What is Accounts Receivable?
Accounts receivable describes the money that is owed to you by your customers for the products or services that you have already sold to them. Typically, this is the money that is agreed upon when you commence doing business together.
Because most businesses don’t expect to be paid in cash, up-front when they sell their services, there is an outstanding balance that will become due for payment on a set date (sometimes 14, 30, or 60 days after the issuance of the invoice). Naturally, the sooner you have that money in your bank account, the better. The problem that comes with post-payment arrangements like these is that some customers might pay their invoices late which will have a knock-on and negative effect on your business’s cashflow.
Why is accounts receivable important?
Accounts receivable is an important area to keep on top of and that’s not only because it affects your cashflow but because it can create confusion about how much money your business physically has access to.
You might believe that you have £20,000 in the bank because of the invoices you’ve sent out but a lot of that money might still be in your accounts receivable. This means that a portion of that money could be promised to you, but it hasn’t physically been paid yet.
The sooner you have the money in your account, the sooner you can start putting it to use. In all of your financial statements, the value of your accounts receivable will be displayed as an asset. This is because, although the money is technically yours, it just isn’t in your possession at the current moment in time.
Is it better to have a high or low accounts receivable?
Generally speaking, it is better to have a low accounts receivable balance. This is because that means that most of your customers have paid you promptly for your work. If you have a high accounts receivable balance, you are going to have to spend time collecting all of the money that you are owed. This is time that could be better spent elsewhere.
How to improve your accounts receivable
Here are three steps that you can take in order to reduce your accounts receivable balance, along with some measures you can take to ensure that it doesn’t start creeping up again in the future:
Give your fast paying customers a discount
It might be worth telling your customers that they can get 5% off your services if their invoices are paid within a week. This will incentivise your customers to pay on time – without having to sacrifice too much of your profit. It’s better to have most of the money in your bank than to have none of it after all.
Penalise late paying customers
If you have a customer that is consistently paying your invoices late or who is actively trying to avoid paying their invoices, you should consider raising the price they pay in the future or demanding that they pay you in advance. Let them know that late invoice payments won’t be tolerated and that should they continue to work with you, they either need to pay on time or face a financial penalty.
Look into accounts receivable financing
This is commonly referred to as invoice factoring. This is where you sell the debt that the customer owes you which was created by the issuing of an invoice to a finance company. They will pay you somewhere around 90% of the value of the invoice immediately. When the customer pays, you get the remaining 10% minus their fee. This might be a hit to your profits so it should be only used as a last resort for those clients who are particularly troublesome.
