What Is Accounts Receivables?
Accounts receivables can be attributed to the amount of money the company or the respective business organisation is bound to receive for its services/goods provided to the customers. Also termed as trade receivables, this particular term can be explained in an example that follows. A business organisation will have an accounts receivable when it delivers a specified amount of goods to its customer on July 1 and the customer is allowed to pay this pending amount within say, 20 days. From July 1 up to the time the company receives this payment, it has an accounts receivable and the customers has an accounts payable. While accounts payables are termed as liabilities, accounts receivables are termed as assets and hold great importance in the financial processes of the corresponding business organisation.
PAYMENT TERMS OF ACCOUNTS RECEIVABLES
The usual payment terms of accounts receivables include NET 30 which is usually a due date of around 30 days or such. The debtor is applicable to payment options within the due period, during which he may be offered substantial discounts for early payment options. Once the due date is successfully obtained, the creditor may impose the necessary fines for late fees as such. Other common payment terms include NET 45, NET 60 which involve the payment period of 45 and 60 respectively.
Any account receivable can be successfully initiated through a simple transaction. However, the whole strategic planning of maintaining and collecting the payments pertaining to the receivables can be whole complex processes. Such critical decisions are necessarily implemented using certain fiscal and financial policies established by the corresponding corporate agencies and business organizations respectively.
There is also a provision for outstanding amounts considering the pending customer debts which are then documented on the balance sheets under the term of ‘contra account’ that offsets total receivables. The inability of the payment collection even after this process is then negotiated by third party agencies via various payment plans, settlement offers and other legal actions.
ACCOUNTS RECEIVABLES AGE ANALYSIS
Also termed as the Debtor’s book-keeping, the accounts receivables age analysis is duly divided into current, a period of 30 days, 60 days, 90 days or longer. The analysis reports thus generated are termed as the Aged Trial balance and contain the records of the customers certainly arranged according to established record keeping criteria.
ESSENTIAL TERMS OF ACCOUNTS RECEIVABLES
The Accounts receivables process also known as the AR process is the complete cash flow from the payable organization to the receivable organization. This merely includes the following steps, the details of which are listed below accordingly:
- Credit decisions: the supplier of the goods and services verifies the credibility of the customer in terms of the credit worthiness to facilitate the supply of products.
- Bill distribution: This basically occurs once the goods or services are successfully delivered by the corresponding organization and the payments for the same are completed from the customer end.
- Receipting, Allocation and Reconciliation: This particular process is undertaken by the AR officer who identifies the payment deposit into the supplier bank account, receipts the same into the AR system, and performs invoice allocation and reconciliation to verify the validity of the payment.
- Collections: The collections officer identifies all the invoices that are short paid or unpaid in terms of the applicable due date.
- Disputes Management: This is typically done when any issue arises on the customer end with reference to the bill payment.
- Bad debt: Once the bill achieves the due date and remains pending either due to unresolved issue or non-payment, it is considered to be as bad debt.
PROCESS FLOW OF ACCOUNTS RECEIVABLES
The general process flow of accounts receivables can be established accordingly into four major categories namely – the setup, creation of transactions, processing of cash and credit management accordingly. The details of this process flow are listed below accordingly for further clarification purposes.
1) Account setup
As discussed above, prior to the setup, the company or the corresponding business organization analyzes the credit decision outcomes for best applicability. Once done, the setup of accounts receivables are cashed accordingly. This involves in-depth understanding of the structure of the company, the processing of the payments and subsequent reporting of the corresponding requirements.
The setup will include defining customers, the terms of implementation, financial charges incurred, the process levels and the default codes of the same. These criteria are essential to establish the payments processing and maintaining of customer balances and reporting accordingly.
2) Creation of transaction
This particular stage of the account receivables process flow primarily defines the creation of invoices, debit memos and credit memos, etc. Once the invoices are created and the transactions are defined successfully, it is time for effective maintenance process of the existing invoices accordingly.
3) Processing of cash
The basic concept of the accounts receivables process is defined in the cash processing stage wherein the cash payment details are mapped to the corresponding transactions. This is either done via manual or automatic processing and interfacing from fund transfer processes, different applications, etc. These processes are then maintained through the successful settlement of disputes, creation of chargebacks and reversing the application processes respectively. Once the whole requirements of the above mentioned processes are achieved, the corresponding bills of exchange are generated and stored in the database.
4) Credit management
Credit management is achieved through review of customer balance sheets and processing of aging reports. Depending on the applicability of certain parameters, every transaction is tracked and submitted for data analysis and he reports for the same are generated over a particular period of time. Once these reports are generated, they are submitted to the reviewing department which then maps the data obtained to the corresponding interface for critical analysis of the financial segments of the given business organization. The accounts receivables data is also stored for further future references and maintained accordingly for best practices.
ACCOUNTS RECEIVABLES BEST PRACTICES
The accounts receivables play a major role in the financial processes especially relatable to substantial cash funding and collateral management. Though there are potential risks associated with this particular agenda, one cannot deny the fact that it is the most lucrative cash funding solution right now available in the given market. A sharp observation of the cash processes of accounts receivables can come in quite handy. Hence, listed below are a few ways to make the best use of accounts receivables to maximize the obtained profits within an organization.
Have a continuous assessment of the cash flow statements
Continuous monitoring and report generation can come in quite handy for critical analysis purposes. This is especially important when you need to keep a steady inflow of finances in the organization.
Keep the AP days shorter than the AR days
Selling on credit implies delayed payments. Hence, it is absolutely essential to keep the accounts payables (AP) days shorter than the accounts receivables (AR) days. This will help in smooth functioning of the organization’s process and ensure great finances in general.
Bridge the gap between the organization and the accountants employed
A strong hold on the organization’s finances can inevitably guarantee better management criteria. The intricate know-hows of the same are employed by the corresponding accountants. Hence, it is absolutely essential to bridge the gap between the organization and the accountants employed as such.