While studying the financial statements of a firm, there’ re a lot of times when the investors focus on revenue streams, earnings per share, and net income.
Even though investigating the revenues of a business is a great way of getting a picture of all its financial health, the whole process of analyzing the accounts receivable also allows you to go deeper with your analysis and understand its working suitably.
Accounts Receivable: Why does it matter?
Accounts Receivable allows you to measure the money that your customers still owe to your business.?
This money could be owed for products or services.
As the business is expecting payments in the future, accountants include the accounts receivable and consider them as an asset that?s recorded on the balance sheet.
But the concern is that most of the businesses don’t expect to collect everything at once in the accounts receivable.
However, with the risk of non-payment, businesses still provide their services without requesting payments in advance.?
Usually, when businesses are dealing with different kinds of customers, they usually allow goods to be sold on credit with the reliable ones for the sake of goodwill and more sales that could come in the future.
Again, the problem is that when the accounts receivable reflects the money that’s owed by the unreliable customers. They could usually default the payments, usually accept the loss and move on.
For the sake of accounting this risk, the businesses also base their financial reporting that not all the debts would be paid.
The accountants refer to this position as the allowance for bad debts.
Usually, on the face value, it’s not possible to understand if the accounts receivable of a business could reflect its healthy or unhealthy business practices.
Analyzing Accounts Receivable
Usually, it means to be in full control of your business.?
Accounts Receivable also plays a very important role in financing your business as it has constructive and destructive power.
There are different ways to foster a profitable business.
Monitoring the bad debts of a business
A lot of businesses, usually every business, have their own share of bad debts.?
As a business owner, you can also analyze if your AR is doing good or not is to check your balance sheet and understand how it’s performing.
You need to figure out the nature of the bad debt and understand how it has evolved over time. If they have gotten worse, then the AR might not be an asset to your business anymore.
In this method, the degree to which the customers have their over-dues is determined. It is a very extensive method for helping you in dealing with problems that you are facing with your customers that have remained for a long time.?
It could also help you in finding loyal customers among a bunch of your customers that could be new or potentially returning ones.?
Accounts Receivable-to-sales ratio
There are a lot of methods that have been developed by analysts to understand the benefits of AR and how the same could be utilized.
The easiest method is the account receivable-to-sales ratio.?
You can obtain the same by diving the AR’s amount by its sales.?
One of the best features of this method is to figure out the level to which the sale of a business is not paid. The far up this number goes, the more receipts are due.
Studying the financial statements
Financial statements contain a list of all the customers that have their payments due.
While you are studying these details, it could help you with the information with different kinds of customers with outstanding debts and how you could target them.
You could also analyze the credit-worthiness of your customers and make your decisions accordingly.?
This process is time-consuming but very fruitful in the future.
So at this point, I’m sure you?d ask, ?Are AR good or bad, and are these an asset??
Well, AR includes the money that you are owed. It definitely is an asset.
These sum up invoices in your sheets.
As soon as your invoices are paid, they don’t remain an asset as they are transferred to your account. And if you don’t get paid, you can write off this invoice as a bad debt.
Analysts have their own ways of analyzing AR. However, they can agree that the maintenance of account receivable helps in determining if it would be an asset for your company or just a liability.
Thus, its analysis is one of the most important things for your business.