Important Details About Accounts Receivable on the Balance Sheet
A study found that only 19% of clients’ transactions with businesses were in the form of cash. Customers are continuously leaning towards credit terms of payment. You need to adjust your operations to match this growing trend as a business.
One way to meet this client’s need is to maintain an accounts receivable balance sheet. The A/R will help you track how much clients owe you and when to expect the payments. It’s a neat way of organizing your finances.
Don’t worry, if you’ve only started selling on credit and don’t know where to begin. Here are all the important details about the A/R.
Accounts Receivable Balance Sheet and Your Cash Flow
The A/R is a current asset on the balance sheet. When you look at it, you might think that the business has the cash to fund its operations. This couldn’t be farther from the truth.
Recognize that accounts receivables represent money that clients owe to you. This is the cash that you shouldn’t rely on or factor into the calculation of the finances available for the business at a particular instance. Instead, look for other sources of cash to cover your day-to-day expenses.
The Payment Terms
You must set the payment terms and get clients to agree before selling on credit. The terms should stipulate the date and amount of money each client has to pay. It should also include a late fee for clients who fail to adhere to your terms.
The payment terms in the A/R might help you to manage your business’s cash flow. If clients stick to these terms, then it’s possible to calculate the amount of cash you’ll have on hand at a future date.
The Amount of the Accounts Receivables
Pay close attention to the amount of debt that clients owe you, as indicated in the accounts receivables balance sheet. Having a large A/R account exposes you to the risk of going bankrupt.
On paper, it might seem like the business has tons of cash when the A/R is large. But this sum doesn’t represent the money you have in the bank. What if most of the debtors fail to honor their terms of payment?
The best thing is maintaining a healthy balance between your cash sales and credit sales. A free online invoice generator will assist your business bill clients who buy on credit on time.
The A/R Turnover Ratio
You must be efficient at collecting debts when selling on credit for the business to stay afloat. The A/R turnover ratio is the credit sales divided by the average A/R for a given period. The higher the ratio, the more efficient you are at collecting debts from your customers.
Keep Track of Your Credit Sales
Selling goods on credit to clients is becoming a norm. You have to adapt to this trend or risk losing your clientele to the competition. However, selling on credit has its challenges which you need to mitigate.
Maintaining an accounts receivable balance sheet should be your first line of defense against the challenges. Details from the A/R will tell you whether your operations are efficient or not. Discover more articles by browsing through the rest of our website.