For a lot of U.S. businesses, late payments from customers can have a detrimental effect on cashflow and make tax season, one long headache.
But, with guidance from accountants in Fort Lauderdale, you can improve the way you manage accounts receivable, ensure swift payments, boost cashflow, and enjoy a tax season not filled with unpleasant surprises.
The difference between accounts receivable and accounts payable
Accounts receivable (AR) is the money owed to your business by customers for goods or services they received from you, but have not yet paid for. Some common types include trade, notes, and interest. On your balance sheet it’s classified as a current asset as it reflects cash that you should receive within a year.
Offering you a snapshot of exactly how much cash is tied up in money owed to your business, managing accounts receivable efficiently helps you maintain a healthy cashflow, keep your financial statements ready for tax season; essentially turning assets into cash instead of bad debt.
Accounts payable (AP), on the other hand, is money owed by your business, to others, such as vendors.
AR, when collected promptly, increases a company’s liquidity, while AP has a direct impact on a businesses ability to cover financial obligations without borrowing.
When payments aren’t collected on time, your business runs the risk of accruing bad debt expense, which will impact your cashflow as well as your overall financial health. If bills aren’t paid in a timely manner, relationships with suppliers could be jeopardized.
The importance of AR for cashflow
How quickly your business can convert sales into cash is an important part of the cash conversion cycle, and when delays are present, it can put working capital in a deadly chokehold.
If you’re not receiving payments from customers within 30 days despite having promptly issued an invoice, you need to start tracking the following:
- Outstanding invoices
- Overdue accounts
- How many days invoices are unpaid for
For a robust cashflow, and no piles of unpaid invoices that could become uncollectible accounts, receivables must be consistently collected.
KPI tracking and its ability to help you manage AR more efficiently
Below are the KPIs you must track in order to get an accurate picture of how accounts receivable is performing:
- Days sales outstanding (DSO) – this is the average number of days taken to collect each payment, and aiming for less than 30 days is advisable.
- Average days delinquent (ADD) – measures payments that are late beyond the date they were due.
- Collection effectiveness index (CEI) – this is the percentage of receivables collected, and a CEI that is 85% or higher, indicates healthy collection practices.
Tracking these KPIs helps to ensure that a businesses bad debt expense is lower, cash flows faster, and financial statements are cleaner for your tax preparation service Coral Gables. Having a direct impact on how you file your taxes, these numbers also demonstrate your ability to cover expenses, and your businesses financial health overall.
With a few improvements to the way in which you manage your AR, you can stop outstanding invoices and late payments from harming the financial stability of your company. By streamlining your AR process, you can also put your company in a stronger position for growth and investments, and keep your financial statements spotless and audit-ready.