Question

Why do we allow receivables in our business.

Why not have a cash only business?

What is the allowance for doubtful accounts used for?

Answer 1

Why do we allow receivables in our business.

Customers are at the heart of your small business, making it important that each transaction is a good experience, and sometimes that includes selling to customers on credit. If extending credit options to customers sounds risky to you, you’re right. A recent survey found that 59% of small businesses that sold to customers on credit had to follow up on late payments at least two times on average. While this doesn’t sound ideal, offering credit options can be a necessary step for staying competitive in your industry.

Why not have a cash only business?

The issue of staying cash-only or allowing other payment types for your small business isn’t black and white. Often, it depends on the type of business you run.

For example, if you own a coffee shop, where the average purchase amount is relatively small, it may make sense to stay cash-only. Customers don’t mind paying for things in cash if the price is low enough.

However, if your average purchase price is high, you may lose customers by accepting only cash. If the cost of losing those customers is higher than the cost of offering more payment options, sticking to a cash-only policy will do your business more harm than good

What is the allowance for doubtful accounts used for?

The Allowance for Doubtful Accounts is used when Bad Debt Expense is recorded prior to knowing the specific accounts receivable that will be uncollectible