Accounts Receivable put simply is the amount of cash that the company has a right to receive. These are payments for goods/services delivered by the Company according to the contract / purchase order with the customer. It is an asset that will be converted into cash or working capital once the customer pays.
For example, a manufacturer delivered $10,000 worth of goods to a customer and the customer is allowed to pay within 30 days. This means that the manufacture has an accounts receivable of $10,000. It is also known as trade receivables.
It is essential for businesses to monitor accounts receivable to ensure payments are received in a timely fashion. When an accounts receivable is not paid on the due date it is essential to immediately follow up with the particular customer to sort out issues if any.
Debtor aging is a tool that can assist SMEs monitor the status of their accounts receivable. It is a report that group all the outstanding invoices by customers and by date ranges (usually in a 30-day bucket: i.e. Current, 1-30 days past due, 31-60 days past due, 61-90 days past due, 91-120 days past due, and 120+ days past due).
Debtor aging allows SMEs to quickly identify the customers that are delinquent in their payments as well as the monetary value that is at risk. As a rule of thumb a healthy accounts receivable should not have any outstanding payment of more than 60 days (unless agreed by both parties). The older a receivable/invoice gets, the less likely that it will be collected in full or at all.
Example of Debtor aging report
A couple of things that SMEs should do to manage their Accounts Receivable.
Today, there are various accounting software available for all business sizes at very reasonable cost. It is able to assists SMEs to closely track all accounts receivable. However, SMEs must utilise this available tool diligently. This requires the discipline of recording all sales as soon as possible to allow the software to track through.
Review Accounts Receivable regularly
Ensure accounts receivable are reviewed on a regularly basis to:
- Identify who are the late payers
- When the payment should be received
- Contacting the customer to resolve any issues that may be holding back settlement
- The amount of payment overdue and may be at risk of being a bad debt.
- Consider if and when active collection process need to be initiated.