Account Receivable

What are Account Receivables ?

Accounts Receivable (AR) refers to the amount of money that a company is entitled to receive from its customers for goods or services sold on credit. In other words, it is the amount that your customer owes you in respect of contractual obligations. Accounts receivables are also known as debtor, trade debtors, bills receivable, or trade receivables.

AR is an essential component of a company's working capital, as it represents cash inflows that are yet to be realized. 

Managing Accounts Receivable

Managing accounts receivable is crucial for maintaining a healthy cash flow and preventing existing capital from going to waste. This involves creating efficient billing and invoicing procedures, implementing collection strategies, and accounting for bad debts.

1. Billing and Invoicing Procedures

Creating a streamlined billing and invoicing process can help ensure timely payments and reduce the risk of disputes. This can be achieved by providing clear and detailed invoices that include all necessary information, such as payment terms, due dates, and contact information. Additionally, using accounting software can help automate the process and reduce errors.

2. Collection Strategies

Effective collection strategies can help businesses improve their cash flow and reduce the risk of bad debts. This involves setting up a system for tracking overdue payments and following up with customers in a timely manner. Sending reminders and making phone calls can be effective ways to encourage customers to pay their bills. Offering incentives, such as discounts for early payment, can also help encourage timely payments.

3. Accounting for Bad Debts

Despite best efforts, some customers may still fail to pay their bills. In these cases, it is important to have a system in place for accounting for bad debts. This involves writing off the debt as a loss and adjusting the accounts receivable balance accordingly. It is important to consult with a financial professional to ensure that bad debts are accounted for correctly and in compliance with accounting standards.

Overall, managing accounts receivable requires careful attention to detail and a proactive approach to billing, collection, and accounting. By implementing efficient procedures and strategies, businesses can improve their cash flow and reduce the risk of bad debts.