Strategy for Accounts Receivable in Financing
Accounts receivable is an accounting term used to describe the payments that a business is owed but has not yet collected. When a business makes a sale, the business charges a specific amount to a customer. If the customer pays immediately, the payment is quickly transferred into a revenue account and counted as an asset for the business. But if the customer does not pay at once, the price is moved into an account for money the business is due to receive. How a business manages its accounts receivable has a significant impact on its success.
Other People Are Reading
-
Accuracy
-
Accounts receivable must be highly accurate for a business to operate correctly. Small errors in other parts of the business can be discovered and corrected with little negative effect, but errors in accounts receivable mean that the business is asking customers for the wrong amount of money. This leads to angry customers and a loss of business, as well as expensive concessions on the part of the company. This is why most businesses choose to keep their accounts receivable functions in-house and hire accountants or use detailed applications to improve efficiency.
Accepted Losses
-
A business must also decide what acceptable losses will be in accounts receivable. A point occurs when it becomes more expensive for a business to pursue collection from a customer than writing off the funds due as a loss. This depends on the type of business, collection techniques and the size of the order. Large orders will be more difficult to write off. If a business uses a collection agency, the costs of the relationship must be accounted for.
-
Payment Timeliness
-
When constructing an accounts receivable system, the business must decide when to set the deadline for payments. Before the deadline the customer can pay without penalty, and the business will at most send a friendly reminder. After the deadline the business must demand payment and potentially begin legal action against the customer. Most businesses set their payment deadlines at 30 days after the transaction, which makes it easier for accounting purposes. Others choose 60 or 90 days, and some round the payment deadline toward the nearest end of the month.
Departmentalization
-
A business must also decide how it will ultimately manage accounts receivable within the company. Even small businesses can gain an advantage by separating their departments. Accounts receivable should not be part of customer service, for instance, but it is up to the company if it will be separate from other areas like sales.
-
