Understanding Accounts Receivables For Small Business Owners

As a small business owner, you need to know what accounts receivables are and how they impact your business finances. Having a deeper understanding of these balance sheet items can help you maintain flexibility, capitalize on time-sensitive opportunities, and boost your cash flow management.

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What Are Accounts Receivables?

By definition, accounts receivables include all monetary obligations owed to your business. They are the amounts billed by your business to clients after completing the delivery of goods or services. It is worth noting that receivables don’t carry any interest; hence it’s regarded as a gift to clients until they clear outstanding invoices. There are two types of accounts receivables, as shown below:

Trade Receivables

Trade receivables incorporate all credits owed to your business by clients who have purchased goods or services. Usually, this results in the accumulation of assets, and this is where the name trade receivables come from. On the balance sheet, accounts receivable (money owed to your business can collect from clients who have purchased goods or services on credit) are often included as trade receivables and are described as current assets.

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Non-Trade Receivables

Basically, non-trade receivables emanate from transactions outside the goods or services a company provides. They include insurance claims receivable, insurance reimbursements, tax refunds, and employee advances receivables.

Accounts Receivables Financing

As an investor, you are constantly looking for the best strategies to boost returns on your portfolio. However, most small businesses struggle to maintain a desirable level of working capital, and yours is not an exception. The good news is, there are numerous opportunities for businesses to collaborate to fix this issue.

In account receivables financing, two or more parties exchange liquid assets in anticipation of future returns. In case your business finds the operating cycle too complicated or struggles to collect debts from clients, this form of financing is your ideal choice.

There are two main types of accounts receivables financing, as shown below:

• Invoice discounting: In invoice discounting, a finance company purchases invoices from the supplier at a discount. Then, the supplier collects the payments. This financing method ensures discretion since, in most cases, the debtor does not know third-party financing was used.
• Factoring: Just like in invoice discounting, the finance institution buys several invoices from the supplier at a discount. When accounts are due, the finance company, otherwise known as the factor, collects payments on behalf of the supplier. Here, the supplier gets immediate payments, but the debtors know that third-party financing was used.

Why Small Businesses Should Maintain Accounts Receivables

There are many reasons why small businesses need to maintain accounts receivables. They include:

• Develop Customer Loyalty

By giving clients goods on credit or long-term payment options, small businesses can get significant sales benefits. Maintain an organized accounts receivables information allows these businesses to make the best out of these sales and build long-term mutually beneficial relationships with clients.

• Track Customer Credit

Having data regarding past purchases and plans allow small businesses to make custom decisions about extending more credit to clients who have a positive payment history and refuse for clients with poor records.

• Track Uncollected Profits

This is, without a doubt, the most critical element of accounts receivables. It helps small businesses establish repayment plans and initiate practical collection procedures. Also, maintaining accounts receivables information provides crucial information in case there are collection processes that find their way into mediation, arbitration, or judicial proceedings. As you track uncollected profits, don’t forget to register for a platinum card to ease your business transactions.