What does Accounts Receivable Mean and How Does it Help Me?
Accounts Receivable (AR) is one of my favorite accounts because it highlights income for your business expected to be retrieved from current clients. AR is, in its simplest form, a list of who owes you money and how much they owe you, and this all starts with invoicing your customers.
Invoicing is the most important thing to do in your accounting work.
When you invoice your client, that billable dollar amount goes into two accounts: Sales and Accounts Receivable. The Sales account appears on the profit and loss statement whereas the AR applies to the balance sheet.
Accounts Receivable should be reviewed once a week, but it’s a task that often gets put off when business owners or office managers get tied up with servicing clients. But, in order to know how to plan your payable budgets or plan for growth, you need to have a sense of outstanding income, so keeping up with your billable tasks is vital to your business.
Another reason to stay atop of billing and invoicing is to be able to monitor if invoices go unpaid for long period of times.
Your AR reporting would highlight this in a 45-60 day column. Having that information available to you empowers you to reach out to delinquent clients about the situation. It could be they missed the invoice. It could be there was a problem with service or felt something was incomplete or missing. It could be they’ve found themselves in a tight spot and didn’t know how to approach the problem. Whatever the reason, you wouldn’t know how to address the challenge if you didn’t know the challenge existed to begin with.
At a 45-60 day delinquency you would most likely reach out with a friendly check-in. However, If you invoice goes into the 75-90 day column or you notice a repeating pattern of delinquency from the same client, you’re now equipped with the information you need to contact the customer with a stronger communication, or full demand when payments are past 90 days. All of this is based on 30-day terms that should be outlined in any of your sales billing as well as within any service contract you have with the customer.
Delinquent accounts eat into your operational costs and the overall health of your business.
Having the ability to see repeating patterns of delinquency can empower you with the confidence to “fire” clients who are a persistent problem. Ultimately, your goal as a small business owner is to never have an invoice go past 45 days.
One more thing to think about; especially if you’re in a position of growth…
If you were going to your local bank for a loan, your billing practices and AR accounts will be one of the things that the bank will look at and can be a defining reason for declining a lending request. By reviewing your AR report on a weekly basis WILL help you increase your cash flow in the long run and put you into a healthier financial position as a business owner.