Accounts receivable sounds like a complex term, but is simple to understand. Most businesses can take advantage of this as a way to broaden their customer base. What exactly does accounts receivable mean, however, and why is it useful?
What accounts receivable means
Accounts receivable is when a business has provided goods or services to a customer under an agreed price, but collects payment at a later date. This means that the fee is outstanding and can be claimed through means such as variable repayment plans. The term is used to talk both about the money owed, and the process itself.
Accounts receivable is in effect the moment a service or product is provided, including before an invoice is sent.
How it’s useful
Accounting and cash flow
Accounts receivable is a useful accounting tool and term. It’s best used on a sheet that calculates your income and displays patterns in payments.
On a bookkeeping sheet, you can reference the accounts receivable as ‘credit’ on your cash account. Once the payment has been made, you then switch this from credit to debited.
Many customers like to be offered the option of a payment plan or the ability to wait, even if they don’t choose them. Payment plans are also excellent for marketing, as you show off your business’s flexibility to potential clients.
Whilst a harsher use, you also have the ability to use accounts receivable to decide when a customer is unable to be taken. This is as you can see the potential cashflow before it actually happens. If a client would be too time heavy the price too small to justify the process, you can refuse goods or services under these premises.
If you want to read more about customer relationship management, you can find the material to do so here.
The risks involved
Using accounts receivable means that you are spending money you simply don’t have yet. It’s similar to using a credit card. This means that if the client is unable to pay on the date, or at all, you may have a hole in your business’s cash flow.
This can be remedied by creating a cash flow buffer. This is an amount of money that you have in cash balance which can be leant back on if needed. All businesses should try to generate one of these when early in development.
It’s important when using accounts receivable to have a method of collecting payment already in place. This makes it as easy for the customer to pay as possible to avoid the aforementioned risk.
Common ways to do this include:
- Payment plans
- Timed Invoices
- Negotiating payment terms further
At least one of these methods should be practiced in a business on a regular basis when payments come late. Failure to do so could ensure payments don’t come at all.