Accounts Receivables Management

Accounts Receivables

Accounts receivables (A/R) are unpaid invoices issued by a business, usually from services rendered or goods sold. They represent the amount owed by customers who have purchased products or services from the business. A/R is an essential part of any revenue cycle management strategy because it represents money that has been earned but not yet received. This section will discuss various aspects of managing accounts receivables:

Accounts Receivable Process

The account receivable process begins when a company extends credit to its customer and issues an invoice. The invoice specifies the terms of payment, such as due dates, discounts for prompt payments, and late fees for missed deadlines. If the invoice amounts aren't paid within the specified timeframe, companies may start reaching out to their customers to request payment.

Aging of Accounts Receivable

Aging of accounts receivable refers to the period between issuing an invoice and receiving payment. This process helps businesses track how old each outstanding invoice is, indicating when they should follow up with customers to collect overdue payments. Commonly used methods for this task include:

1. Dated method: Here, each balance is adjusted only on the last day of the month.
2. Weighted average daily balance: In this case, balances are adjusted continually based on the individual invoice amounts.
3. Systematic method: Each balance is reduced at regular intervals until the total is zero, which can result in more accurate cash flow projections.

Factoring of Accounts Receivable

Factoring involves selling your accounts receivables to another party known as a factor at a discount. When you sell your accounts receivables to a factor, you receive immediate cash while the factor assumes responsibility for collecting the debt from your customers. This arrangement is useful for small businesses that need working capital quickly without having to wait for customers to pay their bills.

Management of Accounts Receivable

Effective management of accounts receivable requires strategies like proper documentation, efficient cash flow forecasting, and clear communication with customers regarding payment terms and schedules. Additionally, creating a system for keeping records updated, setting realistic expectations for collection times, and monitoring overall collections performance can help optimize your A/R processes.

Bad Debts Expense

Bad debts expense occurs when a company is unable to recover debts due to a customer's insolvency or when a payment is deemed uncollectible. Under the revenue recognition rule, bad debts expense should be recognized in the income statement when it is deemed uncollectible, either in the period when the sale is made or the period when the portion of the sale is made that can be estimated to be uncollectible.

Learn about the accounts receivables (A/R) process, aging of accounts receivable, factoring of accounts receivable, management techniques, and bad debts expense. Understand the importance of managing A/R efficiently in revenue cycle management for businesses.