Accounts receivable may be defined as a legally enforceable claim for cash payment from a business to its customers for delivered goods or services. Generally, they are in the form of invoices created by the company and delivered to the customer in order to make him pay within an agreed amount of time.
Accounts receivable is an important factor when determining company’s working capital. If accounts receivable is too high, the firm may have a problem collecting the money it needs to bill and it may soon have a problem with not having enough cash for paying the bills. If it’s lower than necessary, the firm might harm customer relationships or not offering competitive payment terms. Generally speaking, accounts receivable levels correspond to changes in sales levels.
At a high level, accounts receivable is important because it affects the cash flow. In a way, it is part of a neutral territory between inflow and outflow. It will become inflow, but in the beginning it isn’t. And because the goods have been given, or the service has been provided, in a way it is an outflow, but not for a long time.
How to get quicker turnaround
There are some things a company can do in order to get a quicker payment turnaround from its customers.
- Set the right terms at the beginning – general terms may vary a lot, so it is recommended to make the individual deal with each customer (if possible) and set the terms so they are good for both sides. The goal is to get the money as quick as possible – 30 days instead of 60 or 90 days, for example.
- Make the payment process easy for the customers – people are very impatient and most of them don’t want to spend some extra time trying to pay for the invoice. Electronic transfer and mobile credit cards are some of the options the company can consider.
- Make customers want to pay – this means making them pay on time and before, if possible. It can be done by forming loyalty programs, giving discounts, free shipping etc. The main condition would be paying early. This tactic doesn’t only give the company faster payments, but it also generates more regular clients. The other option is a bit more dangerous – the company can make a fee for late payments.