One of the largest and most intimidating hurdles for any small to medium-sized business is accounting. While most businesses offer their own products and services to a fantastic standard, they generally do not have the required knowledge to tackle accounting tasks appropriately.
Terminology can be one of the most confusing aspects of accounting, given its often very precise language. This is totally necessary though, as it prevents misunderstandings while also ensuring common standards.
Accounts receivable is one of those precise terms you will probably come across very frequently. What does accounts receivable mean, however, and why is it important?
What is Accounts Receivable?
Let’s start with a very basic definition: once you deliver your goods or services to a client and issue your invoice, you are owed a certain amount of money in return. In accounting terms, you classify the monies a client owes you as accounts receivable.
Accounts receivable appears on your balance sheet as a current asset, meaning it counts as collateral in various situations, such as receiving a loan.
How Do You Track Accounts Receivable?
There are two common methods of tracking the value of accounts receivable.
The first is the most sophisticated and follows accounting best practice. In this method, known as the allowance method, you make provisions for bad debt. After all, not all clients will pay what they owe you, particularly if you offer credit to your clients.
This provision can be in the form of a set percentage or it can be based on anecdotal understandings of each client.
By provisioning for the non-payment of accounts receivable, you will have a clearer and more realistic overview of your financial performance.
The second method of measuring accounts receivable is called the direct write-off method. With this option, one simple entry can reduce accounts receivable to its net realisable value. This is a simpler method to use, i.e. if your business knows a client cannot pay – because they have gone into liquidation, for example – then the accounts receivable for that business can be removed.
What Happens When Clients Don’t Pay Their Accounts Receivable?
Normally businesses will define strict payment terms which then shape the billing process. For example, you may stipulate payment terms of within 30 days. You may then also choose to offer discounts for early payments, or you may apply additional fees for late payments.
Of course, it is important you monitor accounts receivable closely according to your payment terms. They should also be accurately updated once you receive a payment. This will ensure you can act quickly to resolve any non-payment issues.
When accounts receivables are not paid, you have several options. This includes implementing your own bad debt/late payment procedures to get the payment in. You can also engage the services of a specialist debt collection agency, plus you have the option of taking the client to court.
Staying on top of accounts receivable, however, is the first step in avoiding late payment issues.
If you need more help and advice with your business, please contact us at Gilroy Gannon today.