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Use cases

Accounts Receivable Asset

Is accounts receivable an asset or liability? Accountants treat it as an asset because it represents money owed to a business by its customer, client, or another party. It is one of the most critical assets for any business as it helps to generate new revenue and provides working capital for operational expenses. Because of this, companies can often leverage accounts receivables to secure credit and investment capital.

What Is an Accounts Receivable Asset?

An accounts receivable asset is an invoice pending payment from customers, clients, or other debtors. Businesses create accounts receivables when they extend credit. This can take several forms.

Credit Sales

Most B2B companies sell on credit and their customers expect to receive it. For example, a retail chain ordering produce from a local farm expects to do so on credit.The store makes an order to the farm, the goods are sent the next day and the farm sends a net 30 invoice. Some B2C businesses also extend credit. For example, phone companies allow customers to pay 12 to 24 months of installments for new devices on their accounts.

Bartered Goods and Services

Most companies do business using liquid assets, but there are many who might choose to barter instead or as part of the deal. For example, the retail company has five extra trucks in its fleet. It allows the local farm to borrow one of these trucks to deliver the additional supplies it needs to boost production. In return, the retail company gets an additional surplus in produce that corresponds with the going rate of renting a commercial truck.

How Does Accounts Receivables Work?

The company sends an invoice to the customer. This is a payment request and includes details such as the amount due, payment terms, and payment deadline. The customer must then pay this invoice on or before the due date. The amount owed is counted as accounts receivable until they pay the debt.

If the customer fails to pay by the due date, the company is left in a bind and needs to resolve it. The company may then pursue collection efforts, such as sending a reminder letter or contacting the customer directly to try and get payment. If this does not work, the company may turn over the debt to a collection agency or take legal action.

What Are Some Accounts Receivable Benefits for Businesses?

Most companies would prefer to have cash in hand over accounts receivable. Nevertheless, money owed is still an asset to the business. Consider the following reasons.

Makes Companies More Valuable

Ideally, customers paid for all sales in cash, but that would mean fewer customers and smaller orders. Consider, for instance, what the housing market might look like if buyers could only purchase houses with cash. While it does come with higher risks, extending credit boosts sales for companies. These higher sale values, in turn, increase the overall value of the company based on the expected revenue it will collect.

Makes It Easier to Qualify for Low-Interest Loans

Companies can also use accounts receivable as collateral. Having strong accounts receivables enables companies to qualify for loans at lower interest rates. Some business lenders specialize in offering loans backed by companies’ accounts receivables.

Keeps the Inventory Moving

Some companies need to keep inventory moving fast because they sell perishable items. Even for companies that don’t sell consumables, having customers purchase goods with credit keeps their inventory from sitting on the shelf. Consider smartphones as a good example. These devices are by no means perishable, but technology changes so fast that they lose value the longer they stay in a warehouse. High-value companies must ship out the inventory and keep operations going.

What Can Companies Do To Maximize Accounts Receivable Benefits?

Companies should create systems that optimize their abilities to get the most out of accounts receivables. In other words, they need to ensure that payments owed become debts paid promptly.

Manage Credit Risks

To reduce the risk of late and default payments, companies can use credit checks to assess the likelihood that a customer will pay promptly. Companies should also create clear payment policies and review them regularly. Finally, the sales team should extend credit based on creditworthiness.

Automate Accounts Receivable

Use software to track payments, send reminders and collect data about customers who pay late or default on their debts. Automation also makes it easier to create reports that can help monitor customer creditworthiness and ensure there are no discrepancies in the accounting records.


Offer Flexible Payment Options

Offer customers multiple payment options or even set up structured repayment plans. This makes it easier for the customer to make payments, increasing the chances of being paid. Flexibility can also include different methods of payment. For example, not all companies have gone digital. Some still prefer to process and mail out checks or drop by with cash in an envelope.

Match Payment Schedules

Companies can sometimes negotiate payment terms that match their cash flow needs. This involves setting up a schedule where payments occur regularly throughout the year. Doing this would enable the company to plan and anticipate future cash flows more effectively.

How Is Accounts Receivable Treated on the Balance Sheet?

Accounts receivables are listed as current assets on a company’s balance sheet because the accounting team expects to collect payment within a year. Because of this, accounts receivables are classified in the short-term asset account. Current liabilities, such as accounts payable and accrued expenses, are also listed on the balance sheet and should be balanced against your accounts receivable current asset.

What Are Some Top Metrics for Measuring Accounts Receivable Performance?

Because of accounts receivable’s direct correlation with cash flow and company value, financial professionals must monitor it closely. With a strong focus on improving performance, businesses can increase cash flow and improve overall financial health. Companies can use accounts receivable analytics to adjust their collection strategies accordingly and maximize their accounts receivable benefits. They can use these metrics to get started:

  • Average Days Sales Outstanding (DSO) – This measures the number of days it takes for customers to pay after a sale.
  • Total Accounts Receivable – This is the total amount of money customers owe.
  • Uncollectible Accounts (Bad Debt) – This is the portion of accounts receivable that companies don’t expect to collect.
  • Cash Collection Rate – This measures the rate at which cash flows in from receivables.

How Does Automation Software Streamline the Accounts Receivable Process?

When companies use A/R automation, it calculates performance metrics and provides updates in real time. Automation tools also offer the following benefits to the A/R workflow:

  • Simplified payment process that works 24/7
  • Reduced human labor hours spent on collections
  • Reduced incidents of human error
  • More accurate data for accounts receivable balance sheet tasks

Gaviti has helped our customers achieve these benefits and more. They have also reduced DSO, reduced bad debt, and boosted monthly cash flow. What will our software help your business accomplish? Speak to a Specialist to find out.

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