Most importantly, do you understand how accounts receivable affects your business finances? These balance sheet items can affect or damage your business. With in-depth knowledge of accounts receivable automation system, you can improve cash flow management, take advantage of critical opportunities and maintain flexibility.
Most companies sell to their customers on credit. This means they deliver goods and services promptly, send invoices, and receive payments a few weeks later. Companies keep track of all money customers owe them through accounts on their books called accounts receivable.
Customers are the heart of your small business so it is important that every transaction is a good experience and sometimes involves selling customers on credit. If giving your customer a credit option sounds risky, you’re right.
A recent study found that 59% of small businesses selling to credit customers had to track arrears at least twice the average. While this may not sound like ideal, offering credit options can be an important step in staying competitive in your industry.
Let’s look at the most important and detailed demands. We will also cover key financial terms such as accounts receivable, accounts receivable ledger, factoring etc.
Table of Contents
What are the accounts receivable?
Accounts receivable is all money that customers have paid to you for goods or services they have purchased from you in the past. This money is usually collected after a few weeks and recorded as an asset on your company’s balance sheet. You use accounts receivable as part of your accounting.
What is an accounts receivable automation system?
Accounts receivable automation system (abbreviated “AR automation system”) is basically software that supports and tracks AR functions.
For example, a simple invoice triggers the start of the claims process. You can upload invoices with our accounts receivable management system.
Once the invoice is uploaded, our accounts receivable automation turns it into a workflow task. Here you can see how the entire automation system works for receivables.
How do accounts receivables work?
If your company charges customers who pay over time, your company has accounts receivable. Here you will find a brief guide on accounting for accounts receivable.
Create an invoice for the services provided. Make sure your invoice includes the following information:
- The exact date
- User information
- Services provided
- Outstanding balance
- Deadlines
- Relevant information about the order, if provided by your customer
- your contact details
- Terms of payment
Debiting and crediting the correct account to your accounts receivable.
- Debtor Debit for the amount owed by your customer.
- Sales of loans for the same amount.
Collect payments from your customers.
Correct debit and credit accounts to show payment.
- Cash debit to show increase due to payment.
- Credit accounts to reduce the amount owed by your customers.
Advantages of accounts receivables:
Accounts receivable is an important aspect of basic business analysis. Accounts receivable are short-term assets and therefore measure the liquidity or ability of a company to cover short-term liabilities without additional cash flow.
Fundamental analysts often measure accounts receivable in relation to sales, which is also known as the accounts receivable turnover rate.
It measures how often the company has accumulated account balances in the reporting period. Another analysis will include an analysis of outstanding sales days, which measures the average time it takes to accumulate a company’s accounts receivable balance over a period of time.
Accounts receivable example and dummies:
Most companies work part of their sales on credit. Sometimes companies offer these loans to frequent or specialized customers who receive regular bills. This practice allows customers to avoid the hassle of making physical payments with each transaction. In other cases, the company routinely offers all customers the option to pay after receiving service.
An example of an account receivable is an electric company that bills its customers after the customer receives electricity. The electricity company records receivables for unpaid bills while waiting for the customer to pay off the bill. Dummies: The company sells it for $ 35,000.
The company expects to raise $ 15,000 in a week and the rest in a month. What are the correct records for recording transactions at the time of sale? Answer: AR $ 35,000 and Loan Revenue $ 35,000
Both accounts receivable and sales increased by $ 35,000 as a result of sales. The expected collection model does not affect how the original sales are recorded. Therefore, both accounts receivable and sales must be increased by debiting accounts receivable and crediting sales.
What accounts receivable turnover rate is good or bad?
Once you understand your aging receivable account report, you can take your analysis a step further. You can do this by checking your small business’s income ratio.
While this ratio is rarely used by small businesses, it can be useful. Here you can find out how many times a year a small company collects receivables. From there, you can find out how effective you are at borrowing and raising funds:
Accounts receivable turnover = net turnover with average loans / receivables A high turnover rate can mean that the receivables collection process from your small business is efficient. Conversely, a low ratio indicates that your collection process is inefficient.
This ratio shows your billing efficiency, because it tells you how often you bill your receivables on average per year. You can use previous year’s ratios and averages for your industry to find out if yours was good or bad. The closer you can follow your receivable, the better.
Small businesses usually calculate their income quota on an annual, quarterly, or monthly basis. The longer it takes to accumulate your loan sales, the more likely you are to lose money.
Offering accounts receivable can help keep your small business competitive with competitors in your industry. It can also build strong customer loyalty, help you track customer AR, and improve your small business’s financial organization.
As long as you are able to handle the potential risk of credit, bad credit, and subsequent payments, accounts receivable can be a great option. And who knows? It can even help increase the profit margins of your small business. But!
Why should a company sell its receivables?
If your company offers customers payment terms and cash flow that sometimes fails, selling A / R can make sense. This is not a loan; This is an advance on funds that are already yours. You only get paid instantaneously rather than waiting months for your customers to pay. Accounts receivable factoring is ideal as a short term or long term financing option. Who buys them!
What is account receivables factoring:
Accounts receivable factoring is a type of asset-based financing that a company can use to finance its receivables. This is especially useful for companies that work with customers who pay their bills on time, i.e. with customers who work with the government. Funds are available to customers immediately after invoice and are usually paid out immediately after this invoice is paid.
If your business is in a period of rapid growth and requires fast funds, factoring can be the solution companies that purchase accounts receivable are factoring. With accounts receivable factoring, your receivables are sold at a discount.
While this isn’t right for every business, it’s a short-term solution – typically two years or less – for companies with equally short cash flow needs. Accounts receivable factoring works like this: You sell the receivables in your account at a discount to a commercial finance company called a factor.
The reduction in this factor must be in a range that is nominally higher than the interest rate on business loans from the bank. Factor pays approximately three-quarters of the value of the receivables instantly, and the remainder is due upon receipt of payment from your customer.
Your consent to these factors may cover some or all of your requests. This can also take one to three years. The factors don’t care about your creditworthiness, they care about the credit quality of your customers. Usually this quality is very good. But!
When the factoring company buys your accounts receivable, you get:
- Financing within 24 hours after confirmation
- Big down payment – up to 95 percent of invoice value!
- Fast financing for new customers
- Complete control over your cash flow
Companies that sell accounts receivable need to qualify
Following are the minimum requirements for selling receivables:
- Sell to other companies and give them 90 days or less to pay
- There are customers with good to high credit ratings
- Meets the typical minimum requirement of $ 5,000 in monthly income
How to Find the Best AR Factoring Company?
Accounts receivable factoring is a value added service and you shouldn’t choose a factor based on cost alone. Not only do this company offer our customers a working capital calculation factor that increases with their sales, also offer credit monitoring support as an added benefit of factoring.
Be careful when considering which factors to choose. Fast cash flow funding is important, but keeping your portfolio safe from clients is also important. When deciding which factoring company to work with, look for companies that offer timely, professional, and courteous services for assessing credit risk and overseeing collection.
Companies that buy medical accounts receivables
The first medical factoring option involves entrepreneurs who own service-oriented companies in the healthcare industry. Specifically, medical transcription services, medical utilities, medical personnel agencies, temporary nurse lists, third party medical coding companies, medical billing services, etc.
Can benefit greatly from billing their bills. This type of healthcare provider does not charge third party payers. Instead, they bill the hospital or health facility directly.
PRN Funding is one of the few medical factoring companies that has provided factoring to healthcare providers for over a decade. They work with the healthcare field. This is their specialty and are happy to help you grow your business.
Accounts receivable collection agency:
There are accounts receivable management services that employ trained and experienced AR collection personnel on your behalf. The right AR collection agency has the legal expertise and negotiation skills necessary to collect AR on your behalf in a timely and competent manner.
Choosing a professional AR collection company to manage your delinquent accounts is a wise decision. What should you look for in an AR collection agency? Hire a AR collection agency meets the criteria:
- Capabilities
- Market knowledge
- Results
- Fees
- Compliance record
- References
As a collections agency company, they understand the importance of good cash flow. Highly qualified employees and innovative technology make them the right receivables management service for you. They effectively offer unpaid account returns while minimizing the damage to your customer relationship.
Any collecting agent who deserves salt knows that quality management is ahead of his abilities. Monitoring credit risk, recognizing late payments, and maintaining customer relationships requires a lot of foresight and willingness. Proper management can strengthen your financial situation by reducing bad AR and increasing cash flow.
Factoring loans receivable:
With a bank loan or credit card, the bank or financial institution makes decisions based on your creditworthiness and AR ratio (this applies to your business and, in most cases, to small businesses, to you personally).
However, with accounts receivable factoring, creditworthiness of you and your company is not a major concern. Conversely, the factoring company will consider the country that owes you the claim. In fact, the most important factor is the possibility of paying customers.
Say you can’t qualify for a bank loan. Accounts receivable factoring can still be a viable option in this situation because your credit situation is not the main problem of these factors.
Accounts receivable ledger:
A accounts receivable ledger, also known as a customers ledger, is a ledger that lists all the customers who owe the company money and their current balances.
In other words, the general ledger is a summary of all current accounts receivable and accounts receivable at the end of a period. The individual details of each customer balance are not listed or recorded in the ledger.
Accounts receivable management best practices:
Here are 10 of the best accounts management methods you can adopt for your business in order to limit bad credit.
- Email invoices instead of sending them
- Shorter payment terms
- Offer Different Payment Methods
- Establishing a Credit Policy
- Periodic Review of Accounts Receivable
- Track all unpaid invoices with a phone call if payment isn’t received after a certain time.
- Keep records of collection
- Offer discounts on prepayments
- Using a Factoring Service
- Using a Collection Agency
Accounts receivable outsourcing
The outsourcing company strives to maximize efficiency, save valuable time so you can focus on growing your business. The key to business success lies in an efficient cash flow process. The higher the cash flow, the greater the probability of higher profitability.
They understand this and take it into account when offering receivables solutions. With experts, they can optimize the process of receiving your invoice so you don’t have to worry about your company’s financial processes.
Outsourcing accounts receivables can enable:
- Reduce Today’s Sales (DSO)
- Reduce collection short falls
- Reduce A / R adjustments and elimination of bad AR
- Get transparency in accounts receivable transactions
- Focus on your core business activities (not get stuck in back office processes)
- Offer more effective credit control
- Run a stronger account with lower sales costs
- Adjust the unfilled monetary value
- Reduces operating costs and overhead costs
- Access to a flexible workforce for quick and easy decisions to meet business needs
- Access to more consistent customer interactions and communications which will ultimately increase your customer base
- Maximize e your collection by offering comprehensive credit control
- Improve overall performance
What is inventory financing?
Inventory funding uses company inventory, not invoices. This can be beneficial for companies that cannot provide as much credit as they need to their suppliers. All necessary funds are available once the inventory is purchased and can be paid off as soon as your claim is financed.
How these accounts receivable factoring and inventory financing strategies can be used together:
If your company only uses one of these financing options, accounts receivable factoring is the easiest and cheapest option. Your company’s services are readily available, so it’s up to your company invoice to be paid by your customer.
On the other hand, stock finance is still a viable option if the bills you currently have don’t cover all your expenses. The financial inventory line is completed by selling your inventory, which creates an invoice. These bills can then be calculated and used to complete the lines of credit created by share financing.
These two forms of funding are flexible enough for most small businesses to use, and in the end it’s up to you to decide which option is best for your business.
When Accounts receivable collections are made and procedures?
AR can pile up quickly, but don’t worry, analyzing them won’t be as difficult as it seems at first. To analyze your accounts receivable, you must review the accounts receivable obsolescence report. This report is the standard in most of the claims software used for small business accounting.
The report shows customer invoices that have not been paid at certain times. This could be, for example, the 0 to 30 day age group, the 31 to 60 day age group and the 60 day age group. When viewing accounts in your reports, keep the following in mind:
- Bill number
- Invoice date and due date
- Customer’s name
- All records about collections
- Unsolicited Loans (By eliminating unsolicited credits, you can reduce the amount due from your list, which is better for your business.)
Accounts receivable collections procedures
You need to reach the longest paying customers. From there, you can see the list.
- Deal with customers who are late paying
- Make sure your internal account is up to date
- Consider using software
- Track customers who are always running late
- Avoid following too soon
- Use a AR collection company as a last resort
Conclusion:
On the other hand, effective account management will benefit the company in several ways. The most important thing is increased cash flow through faster cash sales.
It also helps you build better relationships with your clients by avoiding mismatches on unpaid accounts and reducing the risk of bad credit. All of this requires you to be in control of your accounts receivable and you can easily do this with the help of accounting software.
This helps you track, monitor, and respond in a timely manner to past / long awaited accounts, resulting in increased cash flow essential for business growth.