Question

What are some ways that a company can track accounts receivable to ensure that customers are paying on time. What are some consequences of a customer not paying the balance owed on accounts receivable? Please provide three specific consequences.

Answer 1

Ways to track accounts recievable-

Tracking the accounts recievable to ensure timely payments differ according to the size of the company. Some generic points are listed below-

1. Using excel spreadsheets:In this manual process, companies record when they send the invoices, and when they receive payments. This operation might be done by an accountant.

2. Using ERP software or accounts tracking software: Companies very oftenly use softwares to acheive this. The softwares present various reports like 'Aged Recievables report' which shows how much payment is due and when it is expected to be recieved based on the credit policy of the company. This way it is much simpler and effective. Also, automatic alert notifications are sent through these softwares to remind the customers to make the payment.

3. Timely invoicing- Companie should prepare and dispatch invoices immediately after rendering services on credit. Each invoice should contain proper details like the client’s name, account number, date of transaction, description of the services rendered, any discounts offered and total payable amount. These details will be very crucial in tracking your accounts receivable.

Consequences-

1. Difficulty in Obtaining Loans
Non payments will make the financial statements look unattractive which will make it hard for the company to secure loans to pay for revenue or capital expenses.
Creditors look at companies with low working capital as high-risk clients. They might either deny credit or offer loans with excessively high premiums.

2. Prevent Growth of a Business
Non-payments can negatively impact the cash flow of a company. A company will face difficulty securing loans from creditors. This will make it difficult for the company to expand and grow as they won't be able to invest.
Without an adequate source of funding, a company cannot invest in new technology, ventures, and product development. It will cause the business to stagnate and miss out on the opportunity to expand and maximize its profitability.

3. Increases Risk of a Bankruptcy
Another risk of not recieving the payments on time is insolvency.
Companies need cash to pay for expenses. A continuous supply of cash is essential to ensure that all financial obligations are met. When a large number of customers default on payments, it can make it difficult for a company to continue operating.