What does 'accounts receivable' mean and how does it work?

Any business that is running for profit will have two major financial activities - money going out and money coming in to the company. These are called accounts payable and accounts receivable, respectively.

Payables and receivables recording

Recording transactions in the business
Whenever you buy something within a business the cost, the supplier and details of the purchase will be recorded within a ledger. This enables you to make sure that your suppliers on time. Similarly, within the accounts receivable process, whenever an invoice is raised for a service or product delivered to a customer the details of the sale should be recorded in a sales ledger. Essential information on an invoice
In order to make the accounts receivable management simpler, it is essential to include the payment terms within the document. For example, you may want the bill paid within thirty days, in pounds sterling and to a specific address. This information helps the customer to understand what is expected and enables the business to manage its trade receivables.

Managing accounts receivable

Bad debt expense
In business, not all customers are as simple to deal with as we would like. For example, some will not pay within your terms and some may not pay at all. It is essential, therefore, to include a provision for doubtful debts within the business accounts. This will ensure that should you be unable to collect the money it does not come as an unexpected loss to the business. Accounts receivable collections
Not everyone enjoys the process of chasing outstanding payments and, especially in a small business, it may be that time can be better spent. There are many accounts receivable services who specialise in collecting money and if this is not your forte, then they may well be worth investigating. Of course, there will be a charge for the service. Accounts receivable factoring
A second alternative is to use a factoring company. A factoring business will take on the debt of each invoice as it is raised and passed to them. They will pay the originator the value of the invoice, less a percentage commission. This is where they make their own margin. Although this may seem a costly way of handling the problem, if the business generates a lot of invoices, then factoring should be examined as an offset to accounts receivable funding of employees to collect for you. Critical part of business
Many small companies see this element of the business cycle as tedious. While this may be the case, it is also critical to the success of any company. Remember the old adage - cash is king!