As a small business owner, it’s important that you understand the importance of managing your accounts receivable in an organized, systematic manner. Accounts receivable is a term that describes the money that customers owe you after you’ve provided them with a product or a service, and it also refers to your collection process for getting the money that you’re owed. Not only is it incumbent upon you to be efficient in generating your invoices, but also in monitoring the payments you receive, recording them properly, and staying on top of invoices that are not being paid in a timely fashion.
Aging accounts receivable and generating an aging report
Your company establishes its own payment terms with your clients. In most cases accounts receivables are due 30 days after an invoice has been generated: some companies offer discounts for payments received prior to the due date, and others offer special terms to specific clients. Whatever the terms that you offer, once the due date has passed without payment being received, it starts to age based on the amount of time that has passed.
Aged invoices are best tracked through an aging report that breaks down the monies you’re owed in order from the shortest period in arrears to the longest, and your company will be well served by having a strategy for how to handle invoices at each point in the aging process. Some companies decide to take quick action, placing a reminder call or sending out an email on the first day that an invoice is past due: others wait until another 30 days go by. Frequently the decision is based on the client’s previous payment history and the strength of the existing relationship between your company and the client. In most cases, the longer an invoice goes unpaid, the lower the chances are that it will be collected.
Accounts Receivable On the Balance Sheet
Accounts receivable is considered an asset on the balance sheet because it is money that is owed to you, and it remains an asset until it has been paid. The value of your accounts receivable is exemplified by the fact that there are companies who are willing to purchase them, and that is a strategy that every company should consider. Invoices that never get paid can remain on your balance sheet, but you’re still short of the money you’re owed. By selling the invoice to a finance company, you give yourself cash to continue operating your business while permitting them to collect the money. This process is known as accounts receivable financing, invoice factoring, or invoice financing, and usually involves the financing company paying you as much as 90 percent of the invoice’s value.
Invoice financing offers you the benefit of cash on hand in the face of a slow-paying client. The finance company takes a risk, knowing that past due invoices have a lower likelihood of being paid, but they also get a fee if they are successful in collecting the debt. They will also pay a remainder amount to you if the debt is collected.
There are advantages and disadvantages to using bill collection services. Your strategy should be discussed with your accountant before contracting to sell your outstanding invoices.
What to do about bad debt
Another option for uncollectible invoices is to write them off as lost income, which is also known as bad debt. The advantage of doing so is that you are able to reclaim the taxes that you’ve paid on the sale. The right time to do this is when you can see that you are past hope of having the invoice paid. Examples would include a dispute over the invoice, a client who owes you money and who has filed for bankruptcy, or a client who is simply not responding to your pleas for payment. Making the decision to write an invoice off does not mean that you should stop trying to collect the money that is owed to you. Invoice reminders are well worth the effort, and if you’ve written off the debt and end up getting paid in the future, you are able to report the income on a future return to make sure you’re doing the right thing from a tax perspective.
Accounts receivable is a critical part of your business
Having a solid accounts receivable strategy and process in place is critical to having cash flow. You need your invoices paid so that you have cash on hand to pay your own bills, as well as to make payroll. Failure to stay on top of accounts receivable has led to the downfall of many companies. To make sure that this doesn’t happen to you, talk to your financial advisor for help in making sure that your process is well organized and well attended.
Martinez & Shanken, PLLC writes for CountingWorks, an accounting news and advice website. Reach the firm at [email protected]
About Martinez & Shanken, PLLC
Martinez & Shanken, PLLC is a Certified Public Accountant (CPA) firm based in Gilbert, Arizona. We provide a full range of accounting, bookkeeping, consulting, outsourcing and business services. Partners Deborah Martinez and Earl Shanken work to ensure your business accounting is done with integrity and to your satisfaction.
