Everything you need to know about accounts receivable

Accounts receivable is often a confusing term for business owners and entrepreneurs alike.

For accountants, however, it is a cornerstone of effective financial management and ensuring compliance in the eyes of HM Revenue & Customs (HMRC).

Below, we have written a short guide on accounts receivable so you can understand its importance in the management of your business and how you can maximise its benefits.

What is accounts receivable?

In simple terms, accounts receivable refers to the amount of money owed to your business for goods or services provided.

When you make a sale but don’t receive immediate payment, that outstanding amount is categorised as accounts receivable on your balance sheet.

For many small businesses, the belief is that cash is king. However, offering credit terms can be a necessary evil to attract and retain clients.

Therefore, managing your accounts receivable effectively is essential to maintaining a healthy cash flow and retaining customers.

In essence, accounts receivable is an interest-free loan that you extend to your clients, and the quicker you can convert these into cash, the better for your liquidity.

Processes involved in managing accounts receivable

Managing your own accounts receivable is a complex task and is often better outsourced to an experienced accountant. However, there are some basic tenets to follow.

  • Credit assessment: Before extending credit to a customer, it’s wise to conduct a credit assessment. This involves examining their financial history and stability to gauge their ability to make timely payments.
  • Invoicing: After services are rendered or goods are delivered, an invoice is generated. The invoice should detail the products or services provided, along with terms and conditions for payment, often termed as ‘Net 30’, ‘Net 60’, etc., depending on the number of days given to the customer to make the payment.
  • Collection: If payments are not received within the stipulated time, a business needs to employ collection strategies. This can involve sending reminder emails, making phone calls, and in extreme cases, hiring a collection agency.
  • Reconciliation and reporting: Regularly reconciling the accounts receivable ledger ensures all payments are accurately recorded. This information is vital for internal analyses, such as cash flow forecasting, and for meeting external reporting obligations.

How accountants use this information

Accountants use accounts receivable data to help you:

  • Improve cash flow: By analysing the aging schedule, accountants can identify slow-paying customers and suggest specific actions to tackle this issue.
  • Tax planning: Accurate accounts receivable records are essential for determining tax liabilities.
  • Financial analysis: Accounts receivable turnover ratios and other metrics provide insights into your company’s financial health, which can be crucial when seeking loans or investments.
  • Risk assessment: A constantly high accounts receivable could indicate customer dissatisfaction or inefficiencies in your collection process, both of which are red flags for your business.

Why you should outsource to an accountant

Simply put, accounts receivable is complicated and time-consuming and there are numerous benefits to outsourcing this task to a qualified financial professional, like an accountant.

  • Time-saving: Managing accounts receivable is a time-consuming task that involves meticulous record-keeping, timely invoicing, and efficient follow-ups for payment collection. As a business owner, your time is better spent on core business activities.
  • Expertise: An accountant brings to the table expertise in not just recording transactions but also in managing them effectively. This includes optimal credit policies, effective collection strategies, and precise tax calculations.
  • Compliance: With ever-changing financial regulations and tax laws, maintaining compliance is vital. A professional accountant ensures that your accounts receivable management is fully compliant with legal requirements.
  • Analytical insights: A seasoned accountant can provide you with deep insights into customer behaviour, cash flow patterns, and areas for improvement, which could be invaluable for your business growth.

Accounts receivable may sound like just another accounting term, but it’s a critical aspect of your business operations.

Effective management of accounts receivable can make or break your cash flow, directly impacting your business’s sustainability and growth.

Outsourcing this task to an experienced accountant can not only free up your time but also provide you with valuable insights and ensure compliance, thereby aiding in the better management of your business.

Get in touch if you have more questions or need professional help with managing your accounts receivable.

Posted in blog, Business, SME's.