Question

What is The Importance Of Analyzing Accounts Receivable.

Accounts Receivable Financing : An alternative to bank financing for your small business

DISCUSS THE ABOVE STATEMENT BY TAKING EXAMPLE OF BUSINESS ORGANIZATION OF YOUR CHOICE.

* reference only MC GRAW

Answer 1

In business parlance, Accounts Receivable simply means what money the customers owe to a business for any goods or services already provided by it. It is shown in the asset side of the Balance Sheet and generally businesses make a provision upon it on an estimated basis with regard to non-realisation of the same.

Analyzing Accounts Receivable is an important aspect of both accounting and auditing functions. It helps the business to get an insight as to how its credit policy is operating and whether selling on credit is becoming riskier interms of any bad debt or it may be facing undue liquidity crunch in terms of non-collection of payments beyond credit period.

Some of the basic methods of analysis that can be adopted by a small business for eg. a grocery shop are:-

-Ageing of Debtors: Period wise ageing of big debtors-More focus on period more than 6 months

-Debtors to Sales Ratio- Increasing trend to be seen

-Trend of Bad Debts- Incase of increasing trend, it means its a sign of risk.

Acoounts Receivable Financing: Commonly called as "factoring", is the process of selling the accounts receivables of one's business in exchange of cash.

Eg, Company ABC sells toys, it has $ 200000 accounts receivables standing in its balance sheet.Now the company needs immediate cash to buy a new machinery. Company ABC approaches a factor which is ready to purchase the Accounts Receivable in the balance sheet for $ 185000. Company ABC gets immediate cash and the factor gets the entire asset of $200000.

It has become an alternative tool for financing and is a bit complex ones because the risk of receivables shits to the factor hence they are very careful in choosing which company's receivables are to be factored. This is unlike other methods of financing with bank wherein the bank has access to some immovable property of the Company as its security.