A Quick Guide To Understanding Accounts Receivable

Accounts Receivable

Understanding accounts receivable is a key component in keeping a business running. Utilizing accounts receivable as a payment method can help you increase sales and build customer relationships.

Here, we’ll explain what accounts receivable is, why it’s beneficial to businesses, and help you find easy ways to manage it.

What Is Accounts Receivable?

Accounts receivable refers to money owed from one business or individual to another. It is a type of credit that allows someone to purchase a good or service without paying the money for it right away. 

On business documentation, you may see accounts receivable abbreviated as A/R. You may also see DSO on your documents. DSO stands for “days sales outstanding” and measures the number of days that it takes you to collect payments on average.

The lower your DSO, the better because a lower number indicates that you’re getting your money back on time. You should not expect your DSO to be extremely low, like 3, but it should ideally be 45 days or less.

Just like regular payments, businesses must log accounts receivable to make sure they’re getting paid the correct amounts by clients. On the client side, it is also crucial to log money owed, so they don’t accrue too much debt.

Why Accounts Receivable Is Important

Accounts receivable is an important part of a business’s assets, even though it can be risky. If a business offers to sell goods and services on credit, it may end up making more sales and money overall. Companies may increase their profit even though some consumers default on their payments. 

Additionally, accounts receivable can be an effective way to build relationships with repeat customers. People can’t always make payments at the time of their order. If buyers have a good relationship with their suppliers, they will feel comfortable making repeat orders.

How To Manage Accounts Receivable

In managing accounts receivable, the most vital practice is carefully keeping track of every credit and payment. That way, you know who has paid and exactly how much is still owed by your customers.

As a business owner, it is also crucial to know the ratio of money owed to you and actual money made. This way, you can gauge how much money you have and how much money you expect to have. 

When allowing customers to pay with credit, you want to ensure they pay the full amount promptly. So, you must send invoices and payment reminders to increase the likelihood that you’ll get your full payment in a reasonable amount of time.

Remember, though, you should always expect that some of your customers will defect on their payments. This fact must be accounted for when you make revenue projections. Sending customers invoices and payment reminders can help mitigate this problem.

Accounts Receivable Software 

Keeping track of these payments on your own can feel daunting. Luckily, there is software specifically for accounts receivable. This software can take some of the pressure off the business owner by taking care of the time-consuming accounts receivable management automatically.

An accounts receivable software can help you see your credit-to-payment ratio and show you who has paid and who has not. It can also send out invoices and reminders to borrowers and give them an easy way to pay off their credit.

Lastly, accounts receivable management software can show you your analytics, including DSO, track records for customers, money made, and how much credit you can expect to receive.

This type of software does cost money to use but can be a lifesaver to business owners who have a lot of customers who purchase goods and services using credit.

Final Thoughts

Accounts receivable can effectively help your business gain a customer base and make more money in the long run because it allows customers to pay for goods and services using credit. 

However, the thought of too many customers defaulting on payments or the number of invoices one may have to manage is a bit scary. Sometimes, it can cause business owners to fear using accounts receivable as an option for buying their products.

Luckily, business owners can use software to help them with accounts receivable management and thus take some stress out of accounting for credit payments.

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