Accounts receivable (AR)

Accounts receivable (AR) represents money owed to a business by its customers for goods or services purchased on credit. It is a current asset on the balance sheet, reflecting the total value of outstanding invoices.

Key Aspects of Accounts Receivable

1. Definition: Short-term debts owed to a company by customers for products or services provided on credit.
2. Accounting Treatment: Recorded as a current asset on the balance sheet.
3. Cash Flow Impact: Affects a company's cash flow, as it represents future incoming cash from sales already made.

Accounts Receivable Process

1. Receive Customer Orders: Customer places an order, which is approved by the business
2. Credit Assessment: Evaluate customer's creditworthiness if selling on credit
3. Invoice Creation: Generate and send invoices to customers
4. Collections Management: Monitor payments and follow up on overdue accounts
5. Payment Processing: Record and reconcile payments received
6. Reporting and Analysis: Generate aging reports and analyze AR metrics

Payment Terms and Deadlines

• Common payment terms include:Net 30: Payment due within 30 days of invoice date
• Net 60 or Net 90: Longer terms sometimes requested by large customers
• Due upon receipt: Payment expected immediately
• Net 10 EOM: Payment due within 10 days after the end of the month

Importance of Effective AR Management

1. Cash Flow: Timely collection of AR is crucial for maintaining positive cash flow
2. Financial Health: AR turnover ratio indicates a company's efficiency in collecting payments
3. Credit Management: Proper AR management helps in maintaining good customer relationships while minimizing bad debts

Best Practices

1. Establish clear credit policies and payment terms.
2. Implement efficient invoicing and collection processes.
3. Utilize AR automation software to streamline operations.
4. Regularly review and analyze AR aging reports.
5. Offer multiple payment options to facilitate faster payments.

By effectively managing accounts receivable, businesses can improve cash flow, reduce bad debts, and maintain strong customer relationships