Guide to Business Receivables: Definition, Tips, Factoring & Example
Guide to Business Receivables: Definition, Tips, Factoring & Example
- Accounts receivable vs. accounts payable
- Different types of receivables
- 4 Tips to manage business receivables
- Factoring business receivables
There isn’t anything more important to running a successful business than accounts receivable. Every functioning business operates under the auspices of two main concepts: accounts payable and accounts receivable. Where accounts payable relates to paying money out–for services or goods–accounts receivable (or AR) is, as defined by Investopedia, “the balance of money due to a firm for goods or services delivered or used but yet paid for by customers.” Or, in simpler terms, the amount of money a company is due from their customers for whatever product or service they’ve sold. And though the idea of accounts receivable is a basic building block of any business, understanding what it is and how it works will be helpful to any business.
Difference between accounts receivable vs. accounts payable
Accounts receivable and accounts payable are the foundational financial concepts that every business is built on. As we’ve said above, accounts receivable is, in the most basic of terms, the amount of money a company is owed by their customers. Receivables are classified as current assets–money that’s yet to be received–and are only created when sales are made on credit. Accounts payable on the other hand is the amount of money a business owes to its suppliers. Payables are considered liabilities and, like receivables, are only created when a company buys something on credit. And though receivables and payables are, by definition, opposites, the interplay of the two ideas is what allows a business to function. A company must have enough accounts receivable coming to afford their accounts payable or the company won’t stay afloat for long.
What are the different types of receivables?
As we’ve already covered, accounts receivable is the amount of money a business has outstanding in terms of what they need to collect. Collecting your accounts receivable in a fast, efficient manner is incredibly important because, if a business fails to do so, it won’t have the necessary funds to operate its business.
Notes receivable is extremely similar to accounts receivable, but notes receivable can come with longer deadlines. Accounts receivables usually allow a customer anywhere between 30 and 90 days to make payment. Notes receivables on the other hand can be paid back up to a year or even more. The way notes receivables work is through the usage of a promissory note, a legal claim that helps to enforce payment between you and whoever owes you money. If the person who owes you money pays you back before the promissory note comes due, there won’t be any interest charged or accrued. If the debtor fails to pay you back in time, and an extension is requested then interest will be added until the notes receivable are paid off.
Trade receivable is when a company makes a sale on credit. If a customer purchases something or some service from you on short-term credit, this is a trade receivable.
Other forms of receivable
While there are three main types of receivables, there are many other receivables a business might partake in. Interest, salary, employee advances, and tax refunds are just a few.
4 Tips to Manage Business Receivables
1. Upgrade to electronic billing and payment management
First things first: if you haven’t already, it’s time to upgrade and automate payment management. Hours of time and millions of dollars are wasted by accounts receivable departments still slogging through the day-to-day tasks associated with staying afloat. Switching over to electronic billing and payment management lets your customers make payments easier and lets you process these payments with far less work involved.
2. Make sure your billing processes are clear to all involved.
Streamlining the billing process–and communicating the changes made to everyone who touches it–is a great way to make your business receivable run smoother. Look over your existing processes and make sure the way your bills are processed is clearly documented for any and all to see. This will ensure that everyone is on the same page and that payments–from clients to your bank account–will happen quickly and efficiently.
There are so many day-to-day tasks that eat up time and create the potential for mistakes, but with new financial software, businesses have less and less need to worry about them. Automation software takes rote data entry jobs–invoice ingestion, payment scheduling, etc.–off your hands, giving you more time and more peace of mind that they’re getting done correctly.
3. Customers come first.
Business receivables start and end with keeping your paying customers happy. Meaning, whatever you’re doing to improve your business receivables, you need to do so with the customer experience in mind. Are you providing flexible payment options? Are you creating an experience that’s easy to understand and even easier to make payments through? Every step you take towards better business receivables management should start with how it affects your customer.
4. Keep all of your client-facing teams involved.
Getting your AR team in order involves more than just your AR team. Any client-facing team should be up-to-date and in the know in terms of business receivables. Any process changes, software upgrades, or introduction of new policies need to be communicated and explained to every team–and every team member who’s considered crucial when factoring business receivables. Keeping everyone on the same page keeps a business running smoothly and when problems do inevitably arise, they can be handled quickly and without too much fuss.
Factoring business receivables
Business receivables factoring is a method of getting paid in which a business sells unpaid invoices for cash advances. Factoring companies–companies that exist solely to buy unpaid invoices–pay a hefty percentage of the outstanding invoice and then do the work of chasing down the customer and ensuring that they pay. When they’ve received payment, they pay the business the remainder of the balance.
This can be a pricey means of making money but is a good solution if companies are struggling with gaps in their cash flow. Beyond that, if your business is struggling with credit or hasn’t been around long enough to develop strong credit, this is suitable means to frontload working capital.
Example of business account receivables
Let’s say you run a candy manufacturing company. Your company has made a bevy of delicious sweets and you’ve delivered them to candy stores across the country. Once you’ve billed these candy stores for the products you’ve sold them, the money they owe you is now considered a business account receivable.
Managing your business receivables correctly is immensely important to keep your business running smoothly. It’s a huge undertaking that can get complicated quickly if you haven’t made a few necessary upgrades to make the process as efficient and simple as possible for everyone involved.