Financing and running a company’s account is a big responsibility, and very appropriately, in-depth knowledge of finance and accounting is required. The daily expenses of the company, the monies being owed, the monies which are owed to the company and a host of other things have to be recorded to prevent the rundown of the company. Record-keeping is important, and this cannot be overstated. One of such information being recorded, includes what we call “receivables”, also known as Account Receivables.
John Abio gives insight to business terms via his blog.
What are account receivables?
Account receivables fall under the income generated by a company through goods or services sold or rendered. Simply put, account receivables are the debts owed to a company by its customers or other third parties for goods purchased or services rendered, but which have not yet been paid in cash for. These are recorded under a company’s asset accounts and are usually formulated by broadening the credit line to the company’s customers. One might wonder why they are recorded as “assets” but it is pretty self-explanatory. Assets are known as properties owned by entities that have actual value and can be used to stand as collateral applicable to the payment of debts or collection of loans. Receivables can stand as collateral in the collection of loans, and can be used to fulfill short-term commitments so they are considered “liquid assets”.
Why are receivables important?
As said earlier, receivables form part of the income generated by a company and as such, can be considered capital for the company’s procedures to run smoothly. Recording receivable is of optimal importance, as efficient and effective sorting of receivables means that a company is working towards having capital for funding operations. As receivables are basically debts owed to the company, the company should focus on getting these debts to be repaid according to the time, to make sure that company cap does not fluctuate, and that the company net debt is reduced. Debts only have value if they are actually going to be paid, and there should be a system in place for monitoring and collecting debt effectively, so that the company does not run at a loss.
What does a company use account receivables for?
- For funding operations
Receivables serve as money that the firm can use to fund operations.
- To get loans from banks and other financial institutions
Companies can use their records of account receivables to get loans from banks. These receivables can serve as collateral on the loans
- To bolster and boost cash flow in the company
In order to stimulate cash flow in a company, decisions can be made to reduce the credit terms on the account receivable. The company delays paying cash into its account receivable. This stimulates cash flow by bringing lower the rate of conversion of assets into capital or liquid cash
- Companies can also sell their account receivables
In a way similar to which debts can be sole to debt collectors to collect a debt, a firm’s account receivables can be sold at a discounted rate to factoring companies. These companies then become the owners of the debt from third parties, assuming responsibility for the debt and collection processes