Accounts Receivable and Accounting

Elizabeth Macauley

Your small business can’t operate efficiently if you don’t have your accounting practices down pat. This means that if you’re feeling a little shaky on your accounts receivable accounting, you may want to give it another look.

That being said, if this is you, you’re not alone. Only 40% of small businesses owners reported that they felt very knowledgeable or extremely knowledgeable about accounting. To get your skills up to speed, you’ll want to dive deeper into your accounts receivable.

Accounts Receivable Aging Report

Depending on the size of your business, you may have hundreds of customers a year. This is great for sales, but can be very tedious to keep track of — especially if you offer credit options and are waiting for your accounts receivable to arrive.

To keep your records straight and your payments flowing in smoothly, you’ll want to use an accounts receivable aging report. These reports show you which customers are overdue on payments. Each report includes your overdue customers’ contact information. The report will organize your customers into specific groups based on the number of days their invoice is outstanding. These typically follow this four-column format:

  • The left-most column will list all invoices that are 30 days old or less.
  • The next column will list all invoices that are 31-60 days old.
  • The next column will list all invoices that are 61-90 days old.
  • The last column at the right will list all invoices that are older than 90 days.

These reports can be created in minutes using accounting software like QuickBooks or Xero. You also can create a report manually in a Microsoft Excel spreadsheet. These reports are usually generated at least once a month. However, the frequency you generate reports is dependent on how many days your customers have to pay you back. For instance, if you give them 30 days, you may want to generate and review an aging report monthly. If you give them only 10 days, you may want to generate and review a report weekly.

How to Get Paid Faster

If you’re noticing a lot of overdue customers each month, you may need to explore ways to collect your payments faster. Some effective methods include:

  • Using accounting software. Accounting applications and software are more efficient at tracking your accounts receivable than traditional spreadsheets.
  • Sending payment reminders. You can do these manually or you can use accounting programs. For instance, FreshBooks will automatically send email reminders to customers before their invoice is due.
  • Taking appropriate action. Every time you generate a report, you’re going to want to follow up on late payments. This can be done through email reminders or phone calls.
  • Recording repeat offenders. If you are noticing customers who consistently are late or don’t pay, record them. You may want to stop offering credit options to them. After all, each payment they miss is a direct loss for your small business.
  • Accepting online payments. Offering an online payment option allows your customers an easier and quicker way to pay you. You can enhance this even further by emailing invoices to customers with a link to the payment site.
  • Sending unpaid invoices to collection attorneys. This is a last resort option if you have been unsuccessful in collecting payment from a customer after a reasonable period of time.

Credit Risk

Big gains often don’t come without risk. Sometimes, to stay competitive and grow your business, you’ll need to offer credit options to your customers. This means taking on the risk of accounts receivable.

Offering credit to customers can help encourage them to spend more. It may even speed up their spending. Either way, customers generally view credit options as a plus.

Before you jump into offering credit, you’re going to want to manage your risk accordingly. Some risks of offering credit to customers include:

  • Reduced cash flow. Waiting for your customers’ payments will reduce your cash flow. If you don’t account for this, you may have trouble paying for needed supplies and your small business’s operation.
  • Reduced profit. Depending on when your customers pay you back, you may have certain periods of reduced profit. Be sure that you price your products and services correctly, in order to make a profit and stay competitive. (Doing this can take some research.)
  • Debt. If you have a lot of customers who don’t pay you back in a timely fashion, you may find yourself going into debt.
  • Additional resources and time. Implementing an accounts receivable management process may take extra time, energy and resources at first.

To manage these risks, you’ll need to balance the potential for increased sales with the potential for reduced cash flow. You can start by running credit checks on customers before they buy on credit. From there, you’ll want to keep track of customers who continually pay late. If you see a trend, you may want to stop offering them credit options all together.

Recording Services Provided on Credit

The services you provide need to be recorded correctly when you are selling on credit. This helps ensure that you can keep track of them. For each transaction, you need to create an invoice. Once you’ve done that, you will credit the sales account and debit the accounts receivable account for your small business.

At a later date, after the invoice is paid, you will debit the cash account and credit the accounts receivable account.

Recording Sales of Goods on Credit

The same concept applies for selling goods on credit. For each product you sell on credit, you want to record the sale and the related accounts receivable. However, you’ll also need to make sure you reduce your inventory numbers and reflect a cost of sale on your income statement.

Accounting for Early Payment Discounts

Operating a small business takes a lot of motivation. This you already know. At some time during the accounts receivable process, you may need to extend that motivation to your customers, to generate faster payments.

One way to do this is by offering early payment discounts. For instance, you can offer a 1% discount to customers who pay within 10 days, compared to the usual 30 days. Accounting programs like QuickBooks can help you generate custom invoices with early payment discounts added.

The most common discounts offered include:

  • 1%/10 – NET 30. This is a 1% discount if they pay within 10 days.
  • 1%/15 – NET 30. This is a 1% discount if they pay within 15 days.
  • 2%/10 – NET 30. This is a 2% discount if they pay within 10 days.
  • 2%/15 – NET 30. This is a 2% discount if they pay within 15 days.

However, be sure to account for these discounts financially before you start offering them. Typically you can account for early payments by charging the discount as a debit to your sales discount account. You’ll then charge a credit to your accounts receivable account. This will result in a smaller net sales figure that accounts for the discount.

If you’ve committed your small business to offering credit options, make sure you also commit enough time to learning the accounting that goes along with it. During this process, your accounts receivable aging report will be your best friend.

You’ll also want to make sure you understand your credit risk, record your sales correctly and account for early discounts and bad debt. Once you have these down, you should be all set to manage your accounts receivable accounting.

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