Investors focus specifically on revenues, net income, and earnings per share when analyzing financial statements. Analyzing the assets helps in getting a far better picture of the business’s revenues.
Accounts receivable is the sum of money customers owe to a business for goods or services that have already been received. There is a time frame given by every company to their customers for making the payments which is known as the Collection Period. Every business provides an amount of time for collection from customers which is known as the Average Collection Period.
The problem is when accounts receivable reflect money owed by unreliable customers so it gives a better picture of a large number of accounts receivable, businesses create an allowance for bad debts which ensures that a variety of customers may never pay. Thorough knowledge of the receivables is often gained upon careful analysis of the purchasers.
Accounts Receivable explains the held-up cash flow in the unpaid client invoices. It helps in managing the income of the corporate by detailing which customer owes you what amount and for how long.
The following may be helpful in keeping a track of the receivables:
Communicating with the purchasers on a daily basis
Creating a solid internal process of recovery
Confirming and updating the receipt of invoices on a day-to-day basis
Extending benefits like future discounts on timely payments
Documenting all the paths of communication and invoicing
Proper accounting techniques with the only human and technical resources
Importance of the Accounts Receivables
In general, having a lower assets balance is best. This means your company is growing, and your customers are reliable and pay on time.
The higher the receivable ratio, the lesser the possibility of bad debts. The assets Ratio means the number of receivables to total sales which explains the system of how much cash is to be received for the sales already made. If this ratio is high then the company has a better chance of stable cash flows in the future.
Importance of the typical Collection Period
1. Maintaining liquidity
Receiving timely payment for goods sold or services rendered is crucial for every company to maintain a level of liquidity, which allows it to shop for immediate expenses and to get an estimation of time for making larger purchases or investments.
Plan for future costs and schedule potential expenditures
The average collection period figure is also important for the company for preparing an effective plan to make the payments for accounts payable and schedule the potential expenditures for further development and expansion.
It is very obvious if the average collection period is less, the company is performing better. It means a company’s clients take less time to pay their bills. To look at it is that a lower average collection period means the company collects payments faster.
A fast collection period may not be beneficial in terms of gaining customers as it depicts strict payment rules in place which usually is avoided by the customers looking forward to the credit lines at the time of purchasing goods or taking services. the principles may go for some clients. However, tight collection requirements can end up diverting some customers away, forcing them to look for companies with the same goods or services and more lenient payment rules or better payment options.
It is an important task for a bookkeeper to maintain an effective accounts receivable (A/R) management system that can help your business grow even if you expose yourself to the risks of selling goods and services on account. By following some well-established practices, an organization can create an efficient Accounts receivable management process, from sending invoices to using invoicing software and monitoring the receivables efficiency.
2. Send Invoices immediately
A sales or service invoice may be a political document raised by the seller to the buyer for requesting payment. Timely payment becomes an obligation for a customer once a correct document of request is received.
3. Personalize Terms of Payment
Adding customization to the payment terms may attract customers to pay even before the due dates. Giving discounts on early payment is one of the best examples of customized invoicing terms.
4. Have a correct Credit Policy
A credit policy could also be a form of control that protects your business from customers who don’t pay on time. Before the customer thinks of selecting a credit policy, it should be necessary to undergo a strict vetting process which finishes up in lesser receivables.
5. Integrate A/R With Accounting Software
For a much better picture and analysis, it’s worth integrating the invoices with effective accounting software.
6. Segregate A/R Duties
Companies must establish an accurate system for recovering the dues from their customers. an accurate hierarchy should be intact in a group of people that follow up with the customers in a systematic manner.