As we are quickly approaching the end of the year, it’s time to take a look at Accounts Receivable – Year End Review.
It is time to start taking a serious look at your Accounts Receivable.
Accounts Receivable is a significant current asset on your balance sheet. This amount is reported as “net realizable value” – the amount that is expected to be received from customers in settlement of their obligations.
Pulling your Accounts Receivables report is a great way to find out where you stand regarding your customer invoices and balances due. You should be able to organize them in different ways, by customer, category and aging status. If an invoice is more than a couple of months past due, you must get very serious.
Hopefully, you have stopped selling or providing services to this customer.
Start with your most aged invoices and increase the collection pressure. Send them a firm letter asking that the past due amount be paid, and the account brought current. You may also want to start a formal collection process (ask your attorney about this process).
Another option to consider encouraging payment is to offer a cash discount should they pay within your new non-negotiable terms. You will want to analyze the rate of return on this option regarding your cash flow and how it affects your profits.
You may even look at turning the receivable into a Note Receivable. A note receivable differs from accounts receivable by creating a formal document that includes specific terms and conditions, you also have the option of charging interest on the amount due. Again, you will want to analyze how this affects your cash flow and profits.
Even though a thorough check of the potential customer’s credit rating and history of payments to other suppliers will not assure that the customer will pay. Some bad debt losses are inevitable when a business makes credit sales, internal controls and procedures are necessary to keep losses at a minimum to ensure that every reasonable effort has been made to collect all amounts due to the business.
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Looking for more bookkeeping information or tips? Check out our post on 7 Small but Smart Business Budgeting Tips