Accounts Receivable as an Indicator of Income
Accounts receivable refers to money owed by companies and individual customers to third parties in exchange for services or goods that are ordered, delivered, and used but not paid. Clients have the legal obligation to pay for the services used. This is why accounts receivable are treated as a current asset. Clients are sent an invoice for the item purchased.
A portion of the goods and services that companies offer are invoiced to be paid at a later date. This means that purchases are made on credit. Sales are made to special or frequent clients, and there is a specified term within which they have to pay the bill. The term varies between 1 and 3 months. If customers fail to pay within the set term, they can be turned over to collections or charged late fees. The problem is that a customer may go bankrupt, and the company would have to write down its accounts receivables. Such accounts are delinquent accounts. Most businesses have cash reserves to pay suppliers and offset possible losses.
Let’s say that a retail store sells chairs to a hotel chain and gives the client 90 days to pay for the chairs. The retail store has received an order, delivers the chairs, and sends an invoice to the client for the amount of $12,000. The store’s inventory account decreases by $12,000 and the accounts receivable increase by the same amount. When the company’s accounts receivable decrease, this increases the working capital. Positive working capital is an indicator that the business can meet its short-term liabilities. If the liabilities exceed the assets, the business may be unable to pay to suppliers and creditors. This results in working capital deficit, also known as capital deficiency. Bankruptcy is the worst-case scenario in this case.
Businesses keep a close eye on their accounts receivable because they are an important indicator of the company’s income. Accounts payable are the opposite – money owed to vendors and suppliers. Clear records of accounts payable and receivable are necessary to find out the number of transactions and whether the company is making profit. Enter your income and expenses into a profit and loss statement. The business is making money if the remainder is positive and losing money if it is negative. This can be done on a yearly, quarterly, weekly, and even daily basis. A clear idea of the profit a company makes helps owners to make important service, marketing, advertising, and spending decisions.
3 Major Types of AccountsManagers have an impact on 3 types of accounts – accounts payable, current assets or inventory, and accounts receivable. Accounts payable are the company’s liabilities. Slow collections can become a serious problem, resulting in inaccurate forecasts, a poor cash flow, low profits, and wasted labor.
If you send a lot of invoices each week, whether in a hard copy or by email, you can use a money management or accounting software such as Peachtree or QuickBooks. A good program will allow you to keep track of all outstanding, paid, and sent invoices. Notify your clients in advance if the changes that you make will affect the way in which they pay bills or receive invoices. It is important to optimize the billing process. Regardless of the accounting program of choice, the goal is to monitor when bills are sent and accounts opened. This depends on the goods and services you offer. One way to streamline the process is to sign a contractual agreement that clearly states the terms and payment standards. The terms of payment should be put in writing in your terms-of-sale agreement. Don’t forget to outline a payment timeframe or schedule that works for your company and customers. Obviously, you should develop a procedure to follow invoices that are overdue. You may want to enlist the help of a collection officer or company, an accounts receivable clerk and credit manager, a contract accountant, and of course, a bookkeeper.
Discretionary, Cyclical, and Regular Business and Personal Expenses
Expense refers to the cost of acquiring an asset or money paid for different products and services. Businesses usually pay to suppliers, contractors, employees, and other parties and the aim is to earn revenues. This is the cost of doing business. Types of CostsExpenses can be in the form of...
Cash Inflows and Outflows, an Indicator of Solvency
Cash flow is the movement of capital due to investment, normal business operations, or financing. Inflows are money received by a company or organization as a result of its financial activities, investments, sales, and income. Outflows refer to the opposite – money paid to suppliers, banks, and...
Bad Debt and Uncollectible Accounts
Bad debt is money that cannot be collected by financial institutions and is classified as a loss. This usually happens when the debtor, whether an individual borrower or business, declares bankruptcy. Other reasons include lack of cash flow and poor management. Most businesses sell their goods on...
Liabilities to Include in the Balance Sheet
Liabilities are company’s obligations or debts incurred to finance operations. Debts are serviced by transferring services, products, and money. Recorded on the balance sheet, liabilities encompass deferred revenues, accrued expenses, wages, taxes, as well as accounts payable. Deferred revenues are...