If business owners are not able to understand their Accounts Receivable report, they will be less prepared to be able to collect on outstanding invoices says Edmonton bookkeeping. This puts their business at risk of running out of money, and not being able to collect on those outstanding invoices. If an entrepreneur can understand how to read their Accounts Receivable report, they will be able to use that information to ensure they collect on all outstanding invoices.
The Accounts Receivable are all of the amounts that a business is owned by its customers. It is essentially the number of credits that a business owner has extended to those clients. A typical term to allow businesses to pay is commonly thirty days, but it may be forty-five or sixty. Often, the length of the term will be determined by the industry.
Accounts Receivable is reported in the financial statements of the business once in invoices generated. Edmonton bookkeeping says it will then appear on the Accounts Receivable aging summary for the amounts that a customer owes the business. When it is paid, it will be eliminated from the Accounts Receivable aging summary, and a year in the business owner’s balance sheet as cash. The reason it appears on the balance sheet is because it is considered an asset. Business owners should understand that all of the assets on their balance sheet will be listed in order of liquidity, with cash at the top, followed by Accounts Receivable. Entrepreneurs should understand that this is considered money that the company opens, but they just have not collected on it yet.
Examples of companies that generate Accounts Receivable typically our service-based companies, like electricians, plumbers, or homebuilders. They do work, they generate an invoice for the company, and get paid at a later date. Other examples are food suppliers who deliver food to restaurants as well as grocery stores. They drop off the product, leave an invoice, and expect to get paid then the next thirty days. Any business that does not require the client to pay immediately generates and accounts receivable when that invoice is not paid immediately.
Business owners need to understand however that once Accounts Receivable is unable to be collected, it gets reclassified as a bad date and instead of being an asset it becomes a liability. Edmonton bookkeeping says that business owners need to be very diligent in collecting money from their clients, and a good way of doing this is to have a system in place that allows them to make collect calls to their clients regularly.
When a business has Accounts Receivable, it is an indication that they are generating sales, but they need to ensure that they are collecting that money so that they can use the money to pay their own bills, payroll and grow their business. When business owners are not able to collect money, it impedes their ability to become successful says Edmonton bookkeeping.
Edmonton Bookkeeping | Understanding Accounts Receivable Report
It is extremely important that business owners understand how to read to their Accounts Receivable report, also known as an Accounts Receivable aging summary says Edmonton bookkeeping. The reason is, that 29% of entrepreneurs that fail say the reason why their business failed was that they ran out of money. By creating a system that allows business owners to regularly connect with clients that all the money can help business owners significantly in collecting on the invoices that they are owed by clients.
While the Accounts Receivable are all of the invoices that a business is owned by clients, it is important that entrepreneurs understand what high Accounts Receivable means in their business. A high Accounts Receivable means that an entrepreneur has a lot of invoices that they are waiting to get paid. By looking at the date of when those invoices were created, a business owner can make the determination if this is a good thing or not says Edmonton bookkeeping. For example, if an entrepreneur looks at the statement and sees that most of the invoices were created in the last thirty days, not only do they not have a lot of overdue statements, but the fact that they have lots of current invoices, means that they probably had a recent upsurge in business. This is extremely positive and is an indication that the business is growing, and that their marketing efforts are paying off. However, if a business owner looks at the date and sees that they are outstanding for sixty or ninety days, that can be extremely troubling. It could mean that an entrepreneur is having a hard time collecting the money from their clients, and the longer it is outstanding, the more difficult it becomes to collect.
An extremely low Accounts Receivable is also something that business owners need to be aware of. This could indicate a future cash flow problem because it indicates that they are not expecting payments into their business. A business owner should aim to have jobs in a variety of different states of completion in their business so that as some jobs finish and get invoiced, they are receiving payments for others. Having not a lot in the Accounts Receivable report could indicate that a business owner needs to engage in some revenue-generating activities, or increase their marketing efforts says Edmonton bookkeeping.
Once a business owner is able to collect the money from the Accounts Receivable that they generated, the payment will be indicated on the Accounts Receivable aging summary as a negative, that will cancel out the entry, and then it will be recorded in the balance sheets under cash.
When business owners can understand their Accounts Receivable aging summary to understand how the cash flow in their business is looking, they can be proactive in their business and collect money, increase their marketing, and not only be able to ensure that their business is not going to run out of money but also significantly grow their business as well.