In: Accounting
How does one determine the right level of accounts receivable
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. |