When businesses deliver goods and services immediately and wait for customers to pay in the future, the amount of such payments is called Accounts Receivable (AR).
This article will explain in detail what accounts receivable is and the difference between this and accounts payable.
What is Accounts Receivable?
Accounts Receivable is the money that a company will receive from a customer for purchasing a product or service on credit. The credit period ranges on average from a few days to a year . The word “receivable” means that a business hasn’t received the payment yet but will in the future and the money is considered an asset in a company’s balance sheet. More precisely, this data is stored in the “current assets” tab of a balance sheet or chart of accounts.
Accounts Receivable vs Accounts Payable
As already mentioned, Accounts Receivable is the asset of a company that describes the money customers owe your business. Accounts Receivable software is a helpful tool to manage this asset.
Accounts Payable works the other way around. It’s the money your business owes and is described as liabilities in your balance sheet.
For example, you’re an owner of company A and bought goods from company B on credit. For your business, the payment will be recorded as an account payable, and for company B it will be an account receivable.
How do I record accounts receivable?
When it comes to recording sales that you haven’t received payments for, you’ll have to understand what accrual accounting is.
The word “accrual” means an entry made in books in case of income or expense but without the actual money transfer. Such entries are put in an accounting system where accounts receivable or account payable are stored.
When you sell an item on credit, the sale is recorded in the books dependent on the receipt. It is possible that you might not receive the cash when you expect. With accrual accounting, you record a transaction no matter if the payment was made or not. Then you create an invoice that automatically makes credit for this sale in the sales account and makes debit in the accounts receivable.
What if clients never pay?
When it is obvious that an invoice won’t get paid, the record should be written off as a bad debt expense.
When a payment or receivable is no longer collectible due to the client not responding for a long time or not being able to pay because of going bankrupt or any other reason, such a receivable is determined to be a bad debt expense.
Monitoring such records is useful in order to make estimates of how much less money your business will receive due to these kinds of debts.
What if clients eventually pay?
If after a long time you eventually received payment from your client, you’ll have to debit the cash account and credit the accounts receivable again and close it.
Why you need accounts receivable
Accounts receivable should be tracked by a business of any size. Selling goods or services is amazing, but if a client didn’t pay once, you definitely don’t want to deal with this client again. Unreliable clients who do not pay on time can lead your company into debt and bankruptcy if you don’t pay attention to what happens with your accounts receivable and whether all your invoices are paid.
Accounts receivable turnover ratio
Accounts receivable are a significant part of a company’s financial health analysis. Accounts receivable is a way to estimate an organization’s liquidity or capacity to cover current financial obligations without the need to use additional finances.
Analyzing accounts receivable is important in the context of better understanding accounts receivable turnover ratio, which estimates the number of times a company has gathered accounts receivable during a fiscal period. Further analysis will show the dates and the average amount of time a company needs to collect payments over a certain time period.
The accounts receivable turnover ratio is also called an efficiency ratio, and it shows how efficiently a company manages its assets.
Accounts receivable turnover ratio formula
The accounts receivable turnover ratio formula is the following:
Net credit sales is when cash is collected later (another day, week).
Accounts receivable turnover in days
Accounts receivable turnover in days helps businesses to understand how many days it takes to collect a credit payment. The formula is as follows:
Receivable turnover in days = 365 / Receivable turnover ratio
The accounts receivable turnover ratio is a productivity proportion and is a marker of the financial and operational performance of a business. A high proportion indicates that the accounts receivable that a company collects is continuous and proficient. A high accounts receivable turnover likewise demonstrates that a business has a great client base who can pay off credit swiftly. A high proportion can also show that a business follows a traditional flow like net-20-days or even a net-10-days one.
Conversely, a low records receivable turnover proportion explains that a company’s way of collecting payments isn’t the right one. This can be because of the stretching out of credit terms to non-reliable clients who are already in financially difficult situations and are unable to pay.
It’s helpful to compare the accounts receivable turnover ratio between the main competitors or the same companies within one industry. It will give a more significant insight of a company’s performance as opposed to reviewing the number of disengagements. For example, if your company’s ratio is five, it may not be high in general, but enough, and perform well in the industry you work in where the average ratio is three.
Accounts receivable aging schedule
An aging schedule is a table that shows a company’s accounts receivable ranged by due dates. This schedule can be created in accounting software and helps with tracking the upcoming payments from clients so a business owner knows when and what to expect.
The aging schedule has the following categories: current (under 30 days), past due within 1-30, 30-60, 60-90, and more than 90 days.
These schedules are often used to see which clients need payment reminders because the company is often dependent on this money and has to make its own payments as well. If clients don’t pay on time it can cause financial distress.
Also, the aging schedule can show which clients don’t pay systematically, and most likely a company would like to cut any further deals with this client. Or it can be an easy way to track all the overdue payments of one client.
What to do to have fewer overdue payments
To have fewer overdue or unpaid invoices and encourage your clients to pay on time you can do the following:
Make timely payments more attractive – Offer your clients discounts for early payments. For example, 2% OFF if they pay within 72 hours after placing an order.
Send reminders regularly – You can send reminders to clients to make them pay on time. With Synder, you can set automatic reminders and don’t have to worry about forgetting something.
Cut ties with clients who are always late on paying – Unreliable customers always slow down your business growth. No need to keep these clients by your side because they don’t provide profit.
How can Synder help
There are a few things you can easily automate to better manage your accounts receivable .
Firstly, Synder can close open invoices automatically whenever a client pays. You will no longer need to manually search for a certain invoice you created to credit a particular payment of your client. Everything will be done automatically. Check out this 40-second video to see how smooth the process is:
Secondly, Synder can send thank you emails for paid invoices with the help of the new Smart Rules feature. Make your clients feel important and appreciated to develop good business relationships with them.
Thank you emails are not the only thing you can set within Smart Rules. You can send automatic payment reminders to your customers to have fewer overdue payments in your accounts receivable. Make your reminders friendly and polite so people would like to buy your products or services next time.
Accounts receivable is important for your business because it’s one of the main parameters to estimate your business income, even though sometimes you can be misled by your unreliable clients who are not able to pay on time. But this is where managing your receivables is important as well. You can easily spot clients who don’t pay on time regularly and think about how to stimulate your clients to pay punctually. One of the first steps may be to try out Synder and see how much easier your accounts receivable management will become and spot ideas for future improvements.
If you have any questions on how Synder works, feel free to ask questions in the comments, chat or book a live demo with someone from our customer service team. In case you’re curious to try things out on your own – Sign up and activate your free trial (no card number needed).