Good morning and welcome to another episode of always up to date. I’m Denise and this is yai. And today we’re going to be talking about why accounts receivable are important. Um, so as you know with our videos, we like to have a quote tennis statistic. Um, so our quote today is from Peter Drucker. Um, he’s a man who wrote 39 business books, and the quote from him is nothing happens until someone sells something. Um, the statistic that we have today, um, is from CB insights. And so CB insights reviewed essays from failed entrepreneurs. Most of the entrepreneurs listed multiple reasons for failure. 42% of entrepreneurs neuros who failed report, no market for their services or product is one of the reasons of failure. 29% of entrepreneurs who failed were part running out of cash as one of the reasons for failure. 23% of entrepreneurs who’ve failed, reported not having the right team as one of the reasons for failure without Edmonton Bookkeeping.
Uh, these were the three most common reasons, reported all the other reasons that were reported or less frequently. Um, so like pricing and cost, timing, location, et cetera. Um, so we’re looking at a client who sells a product to a customer, but the customer doesn’t pay for it right away and the client will often give the customer time to pay for the product and that becomes an account receivable. So y’all way I understand that you have some questions about accounts receivable. Absolutely using Edmonton Bookkeeping. So, um, first of all, we’d like to start, what are accounts receivable? Yeah. So, um, accounts receivable are basically amounts that are owed to cus, uh, owed by the customer, um, when they’ve bought something from a supplier but haven’t paid for it yet. Uh, so basically the purchaser has bought the product on credit. Yeah. Um, yeah. So, um, instead of paying it right away, they might have a 30 or 60 day, um, time to pay that back.
Yep. So as long as you don’t have anything, you don’t have the payment right away. You’ve got an accounts for say exactly what is an example of an accounts receivable? Yeah. So kind of like what we said. So let’s say we have a company who maybe sell stationary supplies and so you’re a customer comes in and they buy $500 worth of stationary supplies, but they don’t pay for it right away. So the supplier gives that customer 60 days to pay. Um, so once the S the stationary company receives the order and then sends the S the supplies the customer, but the customer hasn’t paid, that becomes an accounts receivable. Um, items like, uh, hold backs receivable, I notes receivable. Those items are also a little bit common. They might be in a separate line item, but, uh, normally accounts receivable are the ones that are a little bit more current in nature.
And, um, uh, I guess hold back would be current as well. But hold back is very particular. Yeah. Um, how is an accounts receivable recorded in my books? Yeah. So, um, once the invoice has been prepared and sent to the customer, um, so the, we’ll go back to the stationary supply company. Um, so they’ve sent a, an invoice to the client for, um, $500. So they’re going to see a $500 increase in their accounts receivable. Um, and now say the customer has 60 days to pay. Once that 60 days is up and, um, the customer pays, um, then the company, the stationary company will see an increase of $500 in their cash account and a decrease in their accounts receivable. Why $500? Yep. Um, on what report is, and it comes receivable recorded. Yeah. So accounts receivable are recorded on a balance sheet, um, accounts receivable or is considered an asset.
Um, so basically, um, the company owns that money, they just haven’t received it yet. [inaudible] yeah. And, um, uh, I don’t know from our previous video, we talked about how balance sheets are listed and it comes receivable are one of the more liquids, one in terms of current assets. So it’d be at the top of the balance sheet, almost closer to cash. Yeah. Basically, you’re expecting your accounts receivable to come in within the next 12 months. Exactly. So, yeah. Um, what happens when the accounts receivable goes down? Uh, so when the, um, once the customer pays the bill and, uh, the accounts receivable is decreased, um, it’s considered a, a source of cash. So then we’re going to see on a company’s cashflow an increase on the cash, um, or their working capital. Right. Um, I know other items that might reduce receivables or writing off for bad debts.
So anyone who’s who, um, who’s a policy is to write off bad debt. When you realize it is, um, um, you’re able to write it off as an expense in your income statements. So if you don’t see the cost, it might be in your income statement decreasing your, um, your income or your profit. So that’s bad debts. And some companies do have a policy called send allowance for bad debts. This is something that, um, normally a company would realize if they have a pattern of seeing a credits not being paid off right away. So those are some of the reasons as well. Why were your comms receivable go down? Yeah. Um, what happens? Oh, sorry. Yeah. What happens when the accounts receivable, it goes out? Yeah. So when the receivable goes up, um, it’s considered the use of the company’s cash. Uh, and so then the, um, cashflow is kind of in a sense, it’s just stretching out the cash that’s being used, um, and the time that it takes to, to receive the money from Edmonton Bookkeeping.
Um, and so, um, okay. The co the company uses up their cash work quickly. So there are, you know, um, yeah, yeah. And sometimes it could be the timing, um, people who would bail at the end of the month but not necessarily collected on the same day. If you look up your balance sheet in a monthly basis, you would, you might be able to see, um, always a high receivable in your income, but really you’re being collected on the 15th day and they’re just being billed on the 30th or the 31st. So the receivable would always show there, but you wouldn’t see the cash flow, uh, coming in and out. Right. And that way. Exactly. Yeah. Um, and we one, this is something that we might, um, want to look at too, because having a high receivable meaning, uh, for it a long time and if you look at them and they’re mostly more than 60 days past due, then maybe you should have a policy of ways cause you might have a collection problem.
Yeah, yeah. Right. Um, are uncollectable receivables and asset? Yeah, good question. Yeah. Um, so uncollectable accounts receivable are not considered an asset, so they get reclassified as a bad debt. Um, and so, um, [inaudible] sorry. Um, companies usually only allow like credit where the supply of customers right. To have it. So you don’t want somebody that you know isn’t going to pay. You usually ask for cash up front. Um, but companies that you know, we’re going to pay, those are the companies that you’ll allow to have accounts receivable, um, in your company just because you know that they’re gonna pay eventually. Yeah, absolutely. Within that 12, 12 month period, but usually 60 days to 90 days. Like, I mean, at the end of the day all we want, like we’re here to make money and collectible, maybe we should address it. [inaudible] yeah. Um, yeah, absolutely use Edmonton Bookkeeping. Um, why do accounts receivable manner?
Yeah, so again, it back to the, um, the working capital, the accounts receivable is included in that working capital. So if it’s too high, um, the company might be lax and collecting their AR and then soon they’re going to be struggling for cash. Right, right. That’s, we all know that’s where you get your cash from is from your customers that have Edmonton Bookkeeping, right? Yeah. Um, yeah. And if it’s too low, um, you might be sort of unwisely harming your customers and not allowing them to have that, that time to pay that little bit of extra time or whatever. And so they might go somewhere else, um, to, to get the same supplies but being able to pay it on a 60 or 90 day term. Absolutely. Um, how long does the customer have to pay the AR? Yeah, so we kind of talked about it a little bit.
I mean, if you don’t get the cash right away, it’s considered AR. So whether they pay it a day late or later or you know, 10 months later it’s an AR. Um, but normally, um, companies have 30 or 60 days. That’s the normal, um, time again, there is a, you can do 90, 90 days. I think it varies on the industry that your does and, um, that’s the stuff that you have to think about, especially for, uh, if you’re expect, if you’re not expecting to collect into next month, um, you still have to operate with that. So, um, yeah, that, that makes it a lot more, um, important for accounts receivable to be, um, trapped. And again, you’re, you’re, um, you’re risking your cash collection based on your, um, your customer’s credit. So, uh, there’s a little bit of risk in there. [inaudible]
yeah, exactly. How does the customer record the AR the received from the company? Yeah. So once the product has been, um, supplied to the customer and an invoice has been given to them, then it becomes a, an accounts payable on their records. Um, so that’s how they would pay that to. Um, we have another video that we’re going to talk about the accounts payable, but yeah. Yeah. So that I think, um, if I know some, I know some companies would loan their customers you each month credit, and I think that would be something to look at if they’re accumulating a lot of accounts payable. Maybe there’s a credit issue with this. Yeah. Yeah Edmonton Bookkeeping is just the best money move. So, um, yeah, I think it’s important to know too, um, where to look for that and your customers signed, uh, financial statements, right? Yeah. Yeah. And I think that’s all we have today. Um, thanks for joining us today. And if you have any questions or comments, please write your comments down below and we’ll try to get to you since we can, um, like hit like, and subscribing for like our videos and we’ll see you guys next then.