Why Is My Accounts Receivables Balance Negative?

Balance sheets must add up to a net balance of zero. That’s because the credit and debit entries should balance each other out. A negative receivables in your cash flow statement means that you owe customers money, rather than the other way around.

How a Negative Accounts Receivables Balance Impact Your Business

In addition to impacting your cash flow, negative accounts receivable can make it seem as though it has more liabilities than it actually does, leading to less interest from investors, customers and other important stakeholders. It can also result in inaccurate financial reports. Since companies typically use these reports as a basis for their decision-making process, it could result in poor decision making.

All of these financial challenges in turn become operational challenges, as more time and resources are needed to identify and fix the inaccuracies. This could lead to significant opportunity costs, as resources are being used which could be directed to other important high-value tasks.

The Main Factors That Create Negative Accounts Receivable Balances

Several reasons might account for why you have a negative account balance. Consider whether the following reasons apply to your financial records.

1) Data Entry Errors

Data entry errors can happen if someone in accounting the user forgets to record a payment or enters it in the wrong column on a spreadsheetthe worksheet. For example, someone on the A/R team could have transposed numbers, entered a transaction for the wrong account, or extended credit to the wrong account. It can also happen when a customer is credited with too much money, leading to an overpayment that is not deducted from their total outstanding balance.

2) Incorrect Treatment of Prepayments

If a customer makes a prepayment for goods or services, someone may record the amount as part of accounts receivable on the balance sheet. But if the amount is not applied to an invoice or deducted from their total outstanding balance, this can lead to a negative accounts receivable balance in your books. For example, a customer might choose to pay when he orders rather than wait for an invoice to be issued. If you record this as a debit before generating an invoice, it could create a negative balance.

3) Premature Debt Write-Offs

Your accountant might record a payment as a write-off if they believe the customer will not be able to pay off the debt. If you later receive payment, it can lead to an account with a negative balance. For example, a customer has an outstanding debt for 120 days and has yet to respond to requests for payment. During this time, a new manager takes over and makes it a priority to settle debts. She pays the outstanding balance of $150,000 in full. If not treated correctly, this payment could create a large negative accounts receivable balance.

4) Ad-Hoc Credit Extensions

Sometimes, companies extend additional credit as compensation or a bonus. Failure to communicate this with the A/R team could create a negative balance. For example, a customer orders 500 items and receives 450 due to an inventory management error. The account manager settles the dispute by extending a credit of $5,000 that the customer can use on the next order. Failure to communicate this to the A/R team could create a $5,000 discrepancy in accounting records.

5) Overpayment From Customers

The extra amount is usually recorded as an asset when a customer overpays an invoice. If there is no way to reconcile this amount with another invoice or account, it can lead to a negative accounts receivable balance. For example, a customer pays an invoice of $100 but accidentally sends an additional $50 in payment. The A/R team credits this extra amount to the account, resulting in a negative balance.

How To Reduce the Likelihood of Negative Accounts Receivable on Balance Sheet

Mistakes do happen, and no solution will completely eliminate errors. Even so, there are steps you can take to significantly reduce the possibility of negative balances and other accounting errors.

Properly Train the Staff

Your A/R team should understand the principles of double-entry bookkeeping, how to reconcile accounts, and how to record payments correctly. Ensure they are also familiar with any other software or technology used for financial transactions. Regular training can prevent data entry errors and ensure that all staff members have the same understanding of accounting procedures. Remember that collections and accounting are separate skill sets, so ensure you assign the best persons to each role.

Reconcile Payments

Financial statements often offer one of the best benchmarks for your records. The A/R team should reconcile payments as soon as they are received and record any discrepancies. Correctly allocate all payments to the proper account, and apply refunds or credits against open invoices. If your team identifies an overpayment, determine if it can be reconciled with another invoice or refunded to the customer.

Review Accounts Regularly

The finance team should review all accounts regularly, looking for discrepancies or unusual activity. It is essential to watch out for any payments that have not been allocated incorrectly or any late payments that the team has not yet addressed. The A/R team should also check for any misallocations between customers and suppliers. Regular reviews help to identify discrepancies quickly and take corrective action.

Enforce Financial Controls

Create effective controls for all financial transactions. This includes processes to segregate duties, using automated systems to detect suspicious activity, and having adequate oversight from management. Ensure your team understands the importance of following procedures correctly and investigating any suspected errors or fraud.

Ensure Close Collaboration

Actions taken by the sales team can directly impact the work of the A/R and accounting teams. These three functions of an organization must work closely together and ensure everyone is on the same page. For example, if the sales team extends an additional $5,000 in credit, it must inform the A/R and accounting teams so they know how to correctly record this extra credit.

Reduce Manual Tasks

Automating the accounts receivable process can reduce the risk of errors. Automation could take the form of online payment portals, invoice automation software, and other financial tools. Automation makes it easier to track payments, reconcile discrepancies, and monitor customer accounts more efficiently. By reducing manual tasks, you can reduce the chances of mistakes and improve transparency across your organization.

Best Practices for Using Technology To Reduce Accounting Errors

The right technology can bring impressive solutions to the table, but more than technology is needed to solve organizational problems. Managers must know what the company needs, identify appropriate solutions, and focus on seamless implementation.

Identify Potential Problems

Is achieving a normal balance for accounts receivable your only goal, or are there other A/R problems your company faces? The best solution tackles multiple issues, so make a complete list of the ones affecting your organization. Then, prioritize them in order of the ones that most significantly impact your business goals.

Research Potential Solutions

Once you have a list of problems, research solutions, and technologies to help. Consider the cost-effectiveness, level of integration, and ease of use when making your decisions. Choose a provider with a solid reputation for serving your business size or companies in your niche.

Ideally, you should choose an automated solution with these and other capabilities:

• Invoices the correct clients and include the right details, such as the accurate and current amount due
• Generates dunning notices to prompt timely payments and reduce issues with bad debt
• Tracks invoices and records payments to accurately project cash flow
• Automatically matches invoices to payments for accurate invoice reconciliation
• Creates a dashboard that automatically calculates and displays the KPIs you need
• Integrates with your accounting software to ensure accurate financial documents

Implement the Solutions

Implementing new processes or technology can sometimes be challenging. Before doing so, ensure you fully understand how each system works and test them thoroughly. Also, train your team to use the new system and encourage them to ask questions.

Monitor Performance

Once everything is up and running, monitor the performance of your solutions closely. Your A/R team should be able to easily track payments, compare customer accounts more efficiently and provide accurate financial statements promptly. Keep an eye out for potential problems and adjustments needed to optimize processes.

Securely Backup Your Financial Data

Your financial data is critical to your organization, so you must ensure it’s secure. Make sure that all of your data is backed up and stored off-site. Use a reliable cloud hosting provider with security protocols to protect sensitive information from unauthorized access.

How Gaviti’s Automated Accounts Receivable Solution Can Help

Negative receivables in your cash flow statement can significantly impact your business and lead to costly mistakes. Gaviti’s invoice-to-cash A/R management and automation platform streamlines the accounts receivables process to eliminate human errors in invoicing, helping to accelerate cash flow by as much as 50% and improving DSO by as much as 30%. It also reduces write-offs and decreases your receivables-at-risk.

Its modules include:

• Collections Analytics Get a range of unique key performance indicators (KPIs) such as Total A/R, DSO, collections rate, customer risk, etc). Advanced analytics allow you to view collections performance over time, both from individual collectors and as a team to identify bottlenecks and methods for improvement.

• Self-Service Payer Portal. View payment history and outstanding invoices in one centralized place. Offer your customers a range of payment options, including credit cards, debit cards, ACH transfers, electronic wallets, and more, enhancing the convenience for your customers and increasing the likelihood of on-time payments.

• Credit Management and Monitoring. Streamline and automate the credit application process with both new and existing customers,  from form submission to approval and ongoing monitoring. Deliver real-time alerts to your collections teams of customers with increased credit risk.

• Cash Application. Automate the process of matching customer payments with corresponding open invoices with the help of Gaviti’s Self-Service Payer Portal. Match payments with the corresponding invoices, ensuring precise application and reconciliation of payments with the help of AI-driven algorithms. This will also help prevent incorrectly recording prepayments or overpayments as receivables.

• Disputes and Deduction. Streamline the tracking, coding, routing, and resolution of customer invoice deductions from a centralized location, providing a collaborative environment where teams can communicate, share documents, and work together to resolve issues. This helps to expedite resolution, improve customer satisfaction, and reduce the impact on cash flow.

Want to learn more about how you can streamline the entire A/R lifecycle with Gaviti? Speak to a specialist today.

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