Accounts Receivable (AR) is the money owed to your business by customers. In the third part of the month close series, we will look at the relevance of AR. The month end close process involves recording, reconciling, and reviewing all business transactions and finalizing the account data for the month. Reviewing Accounts Receivable is an important part of the month close process.
What is accounts receivable?
Accounts receivable is any amount of money your customers owe you for goods or services they purchased from you in the past. This money is typically collected after a few weeks and is recorded as an asset on your company’s balance sheet. You use accounts receivable as part of accrual basis accounting.
Does accounts receivable count as revenue?
Accounts receivable is an asset account, not a revenue account. However, under accrual accounting, you record revenue at the same time that you record an account receivable.
Why is accounts receivable important?
Having lots of customers is great. But if some of them pay late or not at all, they might be hurting your business. Late payments from customers are one of the top reasons why companies get into cash flow or liquidity problems.
How to review accounts receivable?
Businesses often struggle to collect money on time, resulting in poor cash flow management and bad debt. So make sure your customers are paying without delay.
Here are a few steps to follow:
- Create an accounts receivables report. You can do this using a software like Zoho Books
- Follow up with customers who’ve exceeded their credit period
- Account for items such as discounts, and credit notes for disputes or returns
- Recognize bad debt
You can use a simple financial ratio like accounts receivable turnover ratio to see how fast customers are paying you. The ratio is a product of dividing net sales by average accounts receivable.
How will this help in month close?
Review of accounts receivable will help the stakeholders to develop ways to get paid faster and manage cash flows. A regular AR review will help in:
Developing a crystal-clear credit policy:
A business must develop a clear policy for when you can and cannot extend credit to your customers. It is prudent to vet new customers by looking at their credit worthiness. Another tool is to enforce interest for delayed payments.
Offer more payments methods:
If you only offer limited payment options, customers may be more inclined to drag their feet when the invoice due date rolls around. There are costs associated with accepting credit card payments, so be aware of these ahead of time, but allowing customers to pay using their credit cards is usually win-win: you’ll get paid faster and they can rack up points.
Call them and schedule regular reminders:
Simply getting on the phone with a client and reminding them about unpaid invoices can often be enough to get them to pay. Sending email reminders at regular intervals—say, after 15, 30, 45, and 60 days—can also help jog your customers’ memory.
Thus, a monthly review of AR can throw up a lot of information which a business can use to get better. Cash coming into the business at the right time will keep the wheels turning.
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