Accounts Receivable for Financing Companies

Many people fear that the lack of business financing could threaten employment, an essential element in the economic engine. While this may be true, job growth often comes from consistent corporate profitability and higher productivity. Financing companies certainly help in the equation by providing much-needed cash to all organizations, including charities and academic institutions. They record as accounts receivable approved short-term loans and long-term credits.

Accounts Receivable

To increase its sales and accounts receivable, a business consistently screens it customers and narrows the client list to a top few, especially those that purchase bulk amounts and offer repeat business. The firm may then share the list of top or "blockbuster" clients with its marketing and sales workforce, with the hope of motivating top salespeople and generating interest in up-and-coming sales personnel. The goal here is to inspire employees and encourage them to come up with sound ideas to spur sales, which generally affect the accounts-receivable balance. This represents amounts customers owe the company.

Financing Companies

Financing companies play an essential role in the economy, looking into firms' decision-making criteria and understanding how top leadership intends to steer operating activities to profitability. Mastering a company's decision-making process is essential for a financing firm, especially if it must extend funds with a long-term repayment window. Financing, or funding, businesses run the gamut from retail and investment banks to insurance companies, hedge funds and private-equity firms. Any company with business funding as its primary purpose qualifies as a financing firm.

Financing Receivables

For a financing company, accounts receivable are amounts it has loaned to clients. Besides the principal loan amounts, funding institutions include interest as part of customer receivables, although they often record it in the interest-receivable account. Accounts receivable are short-term assets, meaning funding firms expect borrowers to repay them within a period that does not exceed one year. For long-term loans, only the short-term portion counts as accounts receivable.

Accounting

To record customer-receivables-related transactions, a corporate bookkeeper posts specific journal entries, generally under the guidance of an experienced accountant. The bookkeeper debits the customer-receivables account and credits the interest-revenue account. Another account to credit is the loan-receivable account, which gradually brings the principal loan amount down, a process accountants dub "loan amortization."

Reporting

Financial managers record accounts receivable in the "short-term assets" section of a financing company's balance sheet, or a statement of financial position. They also indicate interest revenue in the firm's income statement, also known as a statement of profit and loss. Loan receivables can be short-term or long-term assets, depending on the maturity.

References

• U.S. House of Representatives; Statement Before the Financial Services Committee, U.S. House of Representatives; Edward J. Pinto; Sept. 16, 2009
• Penn State; Does Corporate Lending by Banks and Finance Companies Differ? Evidence on Specialization in Private Debt Contracting; Mark Carey, et al.; June 6, 1995
• University at Albany SUNY; Securities Markets Operations; Emeline Rivas, et al.
• New York University; Financing Growth Companies; Ian Giddy