Question

In certain conditions, AR collections and AR management is the most important function a company has to complete. explain the first sentence. Provide a brief profile of the type of company that must put AR management first in importance. How can Treasury help ensure the viability of a company's future through AR management?

Answer 1

Accounts receivable (AR) is the balance of money due to a firm for goods or services delivered or used but not yet paid for by customers. Accounts receivables are listed on the balance sheet as a current asset. AR is any amount of money owed by customers for purchases made on credit.

Benefits of Accounts Receivable

Accounts receivable is an important aspect of a businesses' fundamental analysis. Accounts receivable is a current asset so it measures a company's liquidity or ability to cover short-term obligations without additional cash flows.

Fundamental analysts often evaluate accounts receivable in the context of turnover, also known as accounts receivable turnover ratio, which measures the number of times a company has collected on its accounts receivable balance during an accounting period. Further analysis would include days sales outstanding analysis, which measures the average collection period for a firm's receivables balance over a specified period.

The importance of receivables management

Every company wants to buy low and sell high. But they can lose everything with poor receivables management during the last phase of the sales process (payment). Over half of all bankruptcies can be attributed to poor receivables management, which demonstrates its importance. Receivables management involves much more than reminding customers to pay. It is also about identifying the reason for non-payment. Perhaps a product or service was not delivered? Or there was an administrative error in the invoice? Good receivables management is a comprehensive process consisting of:

• Determining the customer’s credit rating in advance
• Frequently scanning and monitoring customers for credit risks
• Maintaining customer relations
• Detecting late payments in due time
• Detecting complaints in due time
• Reducing the total balance outstanding (DSO)
• Preventing any bad debt in receivables outstanding

Example of Accounts Receivable

An example of accounts receivable includes an electric company that bills its clients after the clients received the electricity. The electric company records an account receivable for unpaid invoices as it waits for its customers to pay their bills.

Most companies operate by allowing a portion of their sales to be on credit. Sometimes, businesses offer this credit to frequent or special customers that receive periodic invoices. The practice allows customers to avoid the hassle of physically making payments as each transaction occurs. In other cases, businesses routinely offer all of their clients the ability to pay after receiving the service.

How can Treasury help ensure the viability of a company's future through AR management

In principle, good receivables management involves two steps. Firstly, you determine your strategy and then you specify the appropriate procedures.

Step 1. Determine the strategy

• Which customers do you accept and under which conditions?
• Which customers do you monitor?
• Who should no longer be accepted, and when is the exit?

Step 2. Prepare appropriate procedures

• What is your invoicing process like?
• What is your invoice like?
• When do you remind a customer by phone?
• When do you remind a customer in writing?
• What does the reminder look like?
• When do you engage a debt collection agency?
• When will you start legal proceedings?
• What is the role of your employees in this respect? Will you choose outsourcing or in-house management?