4 Reasons Why and 3 Ways How Businesses Should Analyze their Accounts Receivables

Positive cash flows will improve the chances of harnessing quality among accounts receivable operations and the likelihood of collection through the receivables of the company. Analyzing the quality of accounts receivable is critical for a company to assess its financial health. As a guidebook for investors over their company’s financial stability and liquidity, the accounts receivable-to-sales ratio supports investors in analyzing business sales and expected transactions for the same. Stating highly diversified owes to the business through accounts receivable information, makes them less vulnerable than other business accounts in other sectors. This article is aimed at acknowledging reasons why businesses should implement their best practices for effective optimization of accounts receivable operations by skillful improvement of cash flow and working capital position within a short time.

Accepting accounts receivables can direct to more sales where currently clients have no cash on hand but desire to buy the products and services. This arrangement the clients owing to the company, representing as an asset. Listing accounts receivables in the balance sheet as a current asset can turn them into the operating assets of a company or working capital. Listing such assets and liabilities related to the day-to-day operations of a company, accounts receivable take up the position of short-term IOU from customers. 

All receiving of goods & services from a company is expected of eventual payment. But some of the customers will not end up paying due to varied scenarios such as the customer’s financial health or simply being an unreliable customer. Expecting to receive 100% of accounts receivable can be sometimes hard and it is advisable to allocate a contra asset account for doubtful accounts for recording all estimated uncollectible amounts. Accumulated depreciation for reducing property, plant & equipment (PP&E) accounts, are one of the examples of contra asset accounts. Allocating doubtful accounts helps businesses for reflecting their balance sheets on the accounts receivables that most probably can’t be collected. 

Translating such expenses on the income statement as bad debt expenses that are not expected to be collected. Qualitative accounts receivable give lower allowances for doubtful accounts. Quality is an important aspect of accounts receivables, evaluating a company’s balance sheet. Lower accounts receivable is an indicator of poor liquidity and solvency and businesses should give their best in analyzing and measuring the quality of accounts receivable from time to time. OURS GLOBAL’s Accounts Receivable Outsourcing Services assist businesses in focusing their manpower and other resources without wasting time and management efforts on collection activities. With service levels that maintain standards much above the industry norms over key performance indicators, such as Average Invoice submission timelines, Average Invoice collection timelines & Query resolution timelines.

Following are The Four Reasons Why Businesses Should Analyze Their Accounts Receivables: 

1.Cash Flow Forecast & Expectations

Related to the coming in and going out of cash, is termed cash management and is quite an easy process if companies can ensure immediate customer payments in the form of rent, other short or long-term payment plans. Ensuring payment with regularity, businesses must be prompt in following up to collect customer payments before they become due. Disruptions in customer payments infer business expenditure more than the investment. if lease payments, utilities, payroll, taxes, and other organizational overheads are kept as due there won’t be enough cash to pay them.  

2.Easy Business Decision Making

Capability in better prediction of cash flow guides businesses to much clearer decision-making, boosting sales, appropriate pricing, and encouragement in intuitive planning a future of growth. This growth can infer inter-company investments, expansion of product line, and employee hiring. With predictable cash flow, businesses can sell directly to clients as well as to other businesses. With a longer sales process, higher receivables, and lesser customers, B2B and B2C businesses can plan for better growth, expansion, and hiring.  

3.Staying Parallel with the Taxes

Business owners should have a clear knowledge of the taxes they owe. Guiding CPAs for determining deductions and what they owe, businesses can pay their taxes on a regular basis without getting troubled with a large tax bill. Streamlining accounting records can enable calculation, with an accrual or cash basis, taxing accounts receivable at the time of sale or when the cash is received. Effective management of cash flow and staying organized cuts down the stress of paying taxes.

4.Retrial of Venture Capitalists

Hiring a well-experienced and qualified venture capitalist ensures solid cash flow and good financial records reassuring investors. Business owners when selling their companies or seeking investors being organized and attractive accounts receivable process is critical. Extensively studying entrepreneurs to see on good management of accounts receivable are imperative for impressing investors. Signifying the business owner’s in whatever the business is selling, ensures value in receiving payments on time with regularity. 

Following are the Accounting and Accounts receivable best practices:

  • Separate business and personal accounting

  • Comprehensive tracking of all income and expenses

  • Skillful scheduling for the up-to-date organization of records

  • Reconciliation and reviewing of cash flow for inconsistencies

  • Extensive attention to overdue accounts receivable accounts

Following are the Three Ways Businesses Can Analyze Accounts Receivable: 

1.Accounts Receivable-to-Sales Ratio

Measuring the quality of accounts receivable with the accounts receivable-to-sales ratio, by dividing by its sales over a period of time directing to the percentage of a company’s sales that are still unpaid. With a higher receivable to sales ratio, businesses can indicate risk that risk a company faces with lower accounts receivable stating minimum collection of the same. 

2.Accounts Receivable Turnover Ratio

Assessing the quality of accounts receivable by analysis of accounts receivables turnover ratio, the inverse of the accounts receivable-to-sales ratio, with significant adjustment. Calculating the cumulative sales over a period of time per the average accounts receivables balance at the time accounts receivable turnover ratio. Accurate measurement of the rate at which a company can turn its accounts receivable into cash, higher ratio infers higher quality of accounts receivables, indicates a company’s skill in turning receivables to cash faster.

3.Days Sales Outstanding (DSO)

Compilation of Day Sales Outstanding ratio helps in measurement of the quality of accounts receivables. Calculating average accounts receivables divided by sales, multiplied by 365 can give the resultant DSA Ratio. Benefitting from the insight into the average number of days required for a company in the conversion of receivables to cash in the unit of measurable days makes it easy for using it parallel to the accounts receivable-to-sales ratio and the accounts receivable turnover ratio. Shorter DSO infers qualitative accounts receivables, meaning quicker receiving of customer payment. A higher DSO ratio is a sign of stale receivables that cannot be collected refecting the poor quality of corporate earnings. 

With a clear understanding of the business condition and the information we have shared above, businesses can improve their invoicing to be accurate and executed in a timely manner with clear and definite terms. Replacing the nature of billing language from “Payable in ** days” is preferable to “Due immediately” also drives benefits. Invoicing weekly, bi-weekly, or when a shipment leaves is better than hassle-filled monthly invoicing, supporting businesses for payment choices for paying by credit cards, significantly improving the cash flow. Assessing customer quality during credit applications and credit reporting of newer customers can help businesses to direct cash-only sales for slow-paying customers.  

Investigating unpaid invoices and forwarding monthly mail reminders for the same in a firm, polite, and understanding manner is a preferable choice. Remind to double-check your paperwork for invoicing errors can eliminate tardy payments. This can enable businesses to avoid financial disruptions and able to find cash as per requirement. The sign of payment to cross overdue bills, it’s advisable for arranging a loan or line of credit in advance. But maintaining the positive health of accounts receivables operations is mandatory for every business to cater high-quality products and services. OURS GLOBAL’s Accounts Receivable Outsourcing Services assure better receiving of payments in a limited specific time, improving collection rates and quicken invoice processing, contributing towards positive results. Get in contact with us for reinforcing your accounts receivables operations with happy customers likely for on-time payment. 

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