As you learn more about the business world, you will encounter words that you may not be familiar with. Words such as “Accounts Receivable”. Which is very important, by the way. But don’t worry if you don’t know what it is exactly. We start by knowing nothing. All we have to do is to take time to learn things. Now let’s begin to understand the process of accounts receivable.
Understanding Accounts Receivable
Account receivable is the amount of money that a company will receive from the customers who purchased through credit. The credit period can range from a few days to months, or in some cases maybe a year.
Here’s an example:
Let’s say an online store enabled customers to pay for the ordered goods only when it arrives at their doorstep (cash on delivery). The total amount of the product (plus shipping fee if it’s not free) is the money that will be expecting in a few days in return. That’s an account receivable for you.
Installment payment for products or services falls under Accounts Receivable.
Enabling a portion of a business’s products/services to be an account receivable for customers is a great idea to boost sales. Because it greatly encourages clients/customers to choose them over their competitors. And there are a lot of ways to do this aside from the given examples.
How to Setup a Receivable Process
Now that you have a better understanding of accounts receivable, you may be wondering how you can set it up for your business. Here are four main steps:
Establish a Credit Process
Once you determine how much of your goods you want to be on credit, you also need to know if you will offer it to individual customers or only to other businesses (i.e. for a wholesale deal). After that, formulate a form of accounts receivable like cash on delivery, installment, pay later (after couple of days, months, years), etc. Next, set a standard of credit-worthiness, requirements, establish terms and conditions, and clearly communicate interest rates (ensure compliance with Federal law).
It is not advisable for small businesses due to their low cash flow and low capital to offer goods on credit for a longer period. On the other hand, large businesses can do that and could also put reasonable interest rates depending on the payment period.
Setup a Receivable Invoice
An invoice can be a physical or electronic document that is given to the buyer after a sale. Your receivable invoice should detail the products or services that have been rendered, its costs, and the date of expected payment or due. And it should be given right away. Businesses nowadays also gave options to their clients whether they want an electronic or a physical invoice.
Track your Accounts Receivable
For startups or small companies, tracking accounts receivable are usually done through manual tracking. Tools such as Excel or other spreadsheets. After all, they just need to record when the invoice was made and sent, and when the payment has been received. Large companies, on the other hand, may need an officer to do this like a professional accountant. As it differs when there are too many accounts to handle and too many processes are offered.
Lastly, establish journal entries for unpaid debts, bad debts, and early payment discounts to monitor cash flow.
Now, this is just the main steps, there could be more depending on your process. Also, keep in mind that technology nowadays keeps making things easier. Accounting programs are available online to give you ease with the receivable process.
See Also: TRACK BUSINESS EXPENSES