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What is Accounts Receivable?

What is Accounts Receivable?
Tuesday, September 25, 2018

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.

We can help

If you are struggling with a growing accounts receivable balance, get in touch with our team. We can help you put a plan in place to reduce the number of late paying customers you have in order to improve your cashflow. For more information, call us on 01235 768 561 or drop us an email to enquiries@pantheraaccounting.com – we’ll be back in touch with you shortly. 

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We found Panthera via our search for a Xero expert. We knew the software we wanted to use, and needed a forward-thinking accountancy partner who could get us up and running, and teach us the ropes moving forward. Tory and her team have always been on hand to answer our questions, and help us to grow as a business, particularly during periods of big change, such as becoming VAT registered. They are always on hand to alleviate any concerns and help to keep our records in order, which makes our year-end accounts an absolute breeze! Being based in Bristol, our relationship is entirely email based, alongside one consolidation meeting at year end - this keeps things simple, efficient and most importantly, hassle-free.

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The whole team at Panthera are great! Working with them has been a huge support to my growing business. They help me to understand the numbers I need to know. They give me technology solutions like Xero so that I can process things quickly and have access to my own figures. They are quick to reply, highly knowledgeable, nothing is too much trouble and as well as making sure that everything is compliant and on time, they are enthusiastic, professional and fun to work with.

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