{"id":2213,"date":"2023-12-08T09:05:01","date_gmt":"2023-12-08T14:05:01","guid":{"rendered":"https:\/\/arenacfo.com\/?p=2213"},"modified":"2023-12-08T09:11:38","modified_gmt":"2023-12-08T14:11:38","slug":"accounts-receivable","status":"publish","type":"post","link":"https:\/\/arenacfo.com\/accounts-receivable\/","title":{"rendered":"Accounts Receivable"},"content":{"rendered":"\n

What are Accounts Receivable and Why Do They Matter?<\/strong><\/p>\n\n\n\n

Accounts Receivable are one of the most important components of your revenue line.  Very simply, accounts receivable are money you are expecting to flow into your business as a result of work performed or goods and services dispensed.  <\/p>\n\n\n\n

As a business owner you sell a product or provide services to your clients or customers.  In some cases, customers pay you at the time of sale, for example, at the register while checking out.  This transaction happens at retail stores and places where services are rendered in real time.  In other cases, services or products are delivered over a period of time or at a distance.  In those cases, the business owner will send along an invoice for the agreed upon amount for those products or services.<\/p>\n\n\n\n

That invoice, until it is paid, falls under the category of Accounts Receivable.\u00a0 While a major goal as a business owner is to maximize sales, it\u2019s also important to to manage your Accounts Receivable to be as low as possible. You want your revenue to be paid within a reasonable amount of time so that you can manage your cash flow.\u00a0 Managing your accounts receivable (commonly referred to as AR) are an important part of managing your business and improving profitability.<\/p>\n\n\n\n

How do Accounts Receivable Fit Into Your Business Metrics: Profit and Loss Statement, Cash Flow Statement and Balance Sheet?<\/strong><\/p>\n\n\n\n

It\u2019s important to understand how your AR fit into your Profit and Loss Statement, Balance Sheet, Cash Flow, Accounting, and Forecasting.<\/p>\n\n\n\n

 AR on Your Profit and Loss (Income) Statement and Cash Flow<\/em><\/p>\n\n\n\n

Your Accounts Receivable will generally be included in your P&L on the revenue line even though they are not included in your cash flow statement.  This methodology is consistent with Generally Accepted Accounting Practices (GAAP) accounting.  Your Net Profit line will reflect the revenue generated in a given month, collected and uncollected, as well as the costs associated with delivering your products and\/or services.  <\/p>\n\n\n\n

Most small businesses calculate their profits in hand, and thus their taxable income, using a cash flow model.  A cash flow model is as it sounds \u2013 a reflection of actual money and money out each month.  Cash on hand is important as it serves as the resources from which you pay your bills, your employees, and your cost of goods.<\/p>\n\n\n\n

The SEC only requires publicly traded companies to report GAAP-compliant financial statements. Private companies generally do not need to follow GAAP.  The only reason why a small business would utilize GAAP is if they need to share financial performance with certain investors or investment bankers.<\/p>\n\n\n\n

Balance Sheet Accounts Receivable Representation<\/em><\/p>\n\n\n\n

Any amount of money owed by customers for purchases made on credit is AR.  On a small business\u2019 balance sheet, AR show up as an asset, alongside cash and inventory, because there is a legal obligation for a your customer to pay their debt.  They are considered a liquid asset because the money owed can be used as collateral to secure a loan to meet short-term cash needs.  As such, accounts receivable are part of a company\u2019s working capital, though not yet calculated as part of cash flow.<\/p>\n\n\n\n

The money due is expected to be paid in the short-term.  Short-term is usually defined by a few days to a fiscal or calendar year.<\/p>\n\n\n\n

Accounts Payable, in turn, are located on the liabilities side of the balance sheet as they are payments due to someone else, such as a vendor or service provider.<\/p>\n\n\n\n

How do Accounts Receivable Reflect in and Impact Your Financial Forecast?<\/strong><\/p>\n\n\n\n

Accounts Receivable are a very important part of a small business\u2019 forecast.  It\u2019s vital that they are reflected clearly which means that to have a complete forecast a small business needs to include both a P&L forecast and a cash flow forecast.  Forecasts are obviously not \u201caccurate\u201d but a best guess as to what will happen with your business in the future.  These results are a product of the decisions you make along the way.  Accounts Receivable will be impacted by these as well.<\/p>\n\n\n\n

If you believe your business will have more revenue coming in because you invest more in sales and marketing or spend money on something new, your collected revenue and your forecasted Accounts Receivable will be projected to increase.  You might consider the relative risk of this new uncollected revenue and the impacts to cash flow.  Will the increased AR be more likely to pay on time or less likely?  Because Accounts Receivable are a type of loan, will you be carrying more risk on your books in the form of AR or fewer?<\/p>\n\n\n\n

It’s also important to consider the level of effort it might take to collect on your Accounts Receivable going forward.  If you can increase revenue from the same sources as your existing revenue, you will have a better idea how they will convert to cash and also benefit from the  economies of scale that come with collecting from fewer revenue sources.  The more customers you have, the more time it takes time to invoice, track, and collect payments.  At the same time, if you have concentrated revenue from just a few customers, you may have higher risk in total if one or more of them can\u2019t or won\u2019t pay.<\/p>\n\n\n\n

How Do You Manage Accounts Receivables?<\/strong><\/p>\n\n\n\n

Having a consistent, easy, and trackable invoicing system is essential to manage your Accounts Receivable.  For each product or service sold, the customer should receive an invoice or bill that itemizes what they owe:<\/p>\n\n\n\n