Question

In: Accounting

How does one determine the right level of accounts receivable

How does one determine the right level of accounts receivable

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Expert Solution

IF A COMPANY HAS RECEIVABLES, THIS MEANS THE COMPANY HAS MADE A SALE OR RENDERED  
A SERVICE FOR WHICH THE COMPANY HAS TO GET THE AMOUNT WHCH IS DUE FROM THE CUSTOMER.
MOST OF THE COMPANIES FACILITATE A PART OF THEIR SALE OR SERVICE ON CREDIT FOR ENHANCING
THEIR CLIENTILE.
THE COST OF SALE OR SERVICE WHICH IS RENDERED ON CREDIT IS CALLED "ACCOUNTS RECEIVABLE."(AR)
THIS MEANS THE AMOUNT OF MONEY OWED TO THE COMPANY BY THE BUYERS OF THE GOODS AND  
SERVICES RENDERED BY THE COMPANY.
IT IS ADVISABLE FOR ANY COMPANY WHICH OPERATES ON CREDIT SALES OR SERVICES TO SET UP AN AR
PROCESS TO DETERMINE THE CUSTOMERS THOSE HAVE ALREADY PAID AND IDENTIFY THE PAYMENTS  
THAT ARE OVERDUE.
THIS WILL HELP THE COMPANY TO MAKE THE RECEIVABLES TRACEABLE AND MANAGEABLE.
FOUR MAIN STEPS FOR A TYPICAL AR PROCESS :
1 ESTABLISHING CREDIT PRACTICES
2 PROPER INVOICING TO THE CUSTOMERS
3 MAINTAIN A TRACK OF AMOUNTS RECEIVED AND AMOUNTS DUE
4 MAINTAIN ACCOUNTS FOR ACCOUNTS RECEIVABLES
STEP 1 : ESTABLISHING CREDIT PRACTICES :
THE FIRST STEP IS TO DEVELOP A CREDIT APPLICATION PROCESS
THE COMPANY SHOULD FIRST RATE THE CUSTOMER OF THEIR CREDIT WORTHINESS OF THE CUSTOMER
SO THAT THE COMPANY CAN EXTEND CREDIT TO THE CUSTOMER.
ALSO, THE COMPANY MUST ESTABLISH THE TERMS AND CONDITIONS FOR THE CREDIT SALE.
HOWEVER, THE TERMS AND CONDITIONS WOULD DIFFER FOR SMALL AND LARGE COMPANIES.
WHERE LARGE COMPANIES CAN AFFORD LONGER CREDIT PERIOD, SMALL COMPANIES CANNOT AFFORD
LONGER PERIOD AS THEIR WORKING CAPITAL AND CASH FLOWS MAY GET AFFECTED.
STEP 2 : INVOICING CUSTOMERS :
AN INVOICE WILL BE THE PRIMARY DOCUMENT SHOWING ALL THE DETAILS OF PRODUCTS SOLD AND THEIR
RATES OR SERVICES RENDERED.
EACH INVOICE MUST HAVE A UNIQUE NUMBER FOR EASY IDENTIFICATION.
THESE DAYS, ELECTRONIC INVOICES ARE USED IN THE PLACE OF PAPER INVOICES. THESE ELECTRONIC
ALSO MUST HAVE A UNIQUE NUMBER ATTACHED TO IT.
IT MUST BE ENSURED THAT THE INVOICE REACHES THE CUSTOMER AT THE EARLIEST SO THAT THE  
PAYMENTS ARE MADE ASAP.
STEP 3 : MAINTAIN TRACK OF AMOUNTS RECEIVED AND AMOUNTS DUE :
IT MUST BE ENSURED THAT THE PROPER OFFICER , SAY AR OFFICER RECORDS ALL THE PAYMENTS THAT
ARE RECEIVED FROM THE CUSTOMERS AND ALLOCATES THE AMOUNTS TO THE INVOICE CONCERNED.
THE AR OFFICER MUST RECONCILE ALL THE INVOICES AND THE PAYMENTS AT REGULAR INTERVALS TO  
KEEP PROPER TRACK OF ALL THE INVOICES THAT ARE BILLED AND THE AMOUNTS RECEIVED AGAINST  
THOSE INVOICES.
THE TRACKING PROCESS AGAIN DIFFERS IN LARGE AND SMALL COMPANIES. WHILE THE LARGE COMPANIES
USE ADVANCED ACCOUNTING SOFTWARES FOR TRACKING, THE SMALL COMPANIES MAY CHOOSE  
SPREAD SHEETS FOR TRACKING.
STEP 4 : MAINTAIN ACCOUNTS FOR ACCOUNTS RECEIVABLES :
THE AR OFFICER ESTABLISHES DUE DATES FOR THE DATES OF PAYMENTS AS PER THE MANAGEMENT'S
GUIDELINES. AFTER IDENTIFYING THE AMOUNTS DUE FROM DIFFERENT CUSTOMERS WITH THE HELP OF
ACCOUNTING SOFTWARES OR SPREAD SHEETS AS THE CASE MAY BE WHICH ARE MAINTAINED BY THE  
ACCOUNTS DEPARTMENT, THE AR OFFICER MUST BE ABLE TO COLLECT THE AMOUNTS DUE ON THE  
DAYS OF DUE.
THIS PROCESS ALSO INVOLVES DISCOUNTS OFFERED FOR EARLY PAYMENTS OR INTEREST CHARGED FOR  
THE LATE PAYMENTS. ALSO, BAD DEBTS, WHCH ARE NOT RECOVERABLE ARE ALSO MUST BE PROPERLY
ACCOUNTED FOR. THIS ENSURES NOT ONLY PROPER MAINTANANCE OF BOOKS OF ACCOUNT BUT ALSO
IDENTIFYING THE CREDIT WORTHINESS OF THE CUSTOMERS.

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