Trade receivables are one of the fundamental elements of corporate financial management. It covers all receivables owed to a company by its customers, and is of significant importance to the company’s health. Poor management of trade receivables not only affects a company’s cash flow, but also its long-term financial stability. What are the 3 components of accounts receivable? What is at stake for the company, and why is it necessary to adopt a proactive approach to accounts receivable? CashOnTime sheds light on these essential points.
Definition of accounts receivable
In accounting terms, accounts receivable refers to all receivables owed by a company to its customers. These are outstanding amounts owed by buyers but not yet paid by them. Accounts receivable consist of invoices issued for the payment of goods or services.
These amounts are recorded on the balance sheet as assets, in the same way as inventories, equipment or raw materials. In fact, trade receivables make up the bulk of these assets: on average, trade receivables account for half of a company’s assets. So it’s easy to see that it plays a crucial role in a company’s financial management, directly affecting cash flow, profitability and growth.
Trade receivables management therefore consists in effectively monitoring trade receivables, taking into account the time allowed for their payment, and, if necessary, effectively enforcing their collection. For the company, the aim is to strengthen cash flow and limit working capital requirements, since payment of a receivable provides liquidity. Optimizing trade receivables enables you to improve your competitiveness and continue to grow.
What are the 3 components of trade receivables?
Effective management of trade receivables requires a thorough understanding of its 3 components, which are :
- trades receivables ;
- payment terms ;
- invoice tracking.
Trade receivables are all sums owed to the company by buyers, following the sale of goods or the provision of services that have already been completed. The invoice for the service has been issued, but the customer has not yet paid. The receivable becomes due and payable when the payment deadline has expired.
Payment term, the second component of trade receivables, is the number of days that elapse between the completion of the sale of goods or services and their payment. This payment period is generally either contractual, the result of an agreement with your customer, or legal (often 45 to 60 days). In these 3 cases, it is taken into account in the company’s accounts, which can anticipate it. However, it can also happen that payment deadlines are not met. Late payment has a direct impact on the company’s cash flow. That’s why accounts receivable management must also provide for the rapid and efficient collection of unpaid invoices.
In this respect, invoice tracking is the last essential component of accounts receivable. To limit the immobilization of resources and be reactive in the event of unpaid receivables, a tracking tool is an indispensable ally. It can be as simple as a spreadsheet or in-house software, but CashOnTime offers a complete solution that automates the entire Order to Cash process. By effortlessly managing not only the collection process, but also litigation and collection, your company gains in speed and productivity.
What are the challenges related to trade receivables?
The importance of accounts receivable is fundamental to corporate financial management, for a number of reasons.
Firstly, trade receivables have a major impact on cash flow. It represents a significant proportion of a company’s assets. Late payment or unpaid receivables can lead to cash flow tensions, limiting the company’s ability to honor its financial commitments and invest in its future activities.
The second challenge is to limit the risks associated with bad debts. In addition to rigorously monitoring payment terms, the company must also ensure the solvency of its customers. To do this, it is essential to implement strategies to anticipate and avoid major financial risks.
Finally, the third objective is to maintain good customer relations. The company must be both rigorous in its credit policy and flexible, depending on the customer’s risk profile. The challenge is to be clear from the outset, professional during the relationship and firm when collection is necessary. This approach avoids potential disputes without compromising customer relations.
Benefits of optimizing trade receivables
By optimizing its trade receivables, the company benefits from several advantages:
- improved cash flow. Effective management of trade receivables is crucial to maintaining working capital and avoiding recourse to bank credit. This includes effective collection of overdue and unpaid receivables.
- reduced risk of non-payment. For example, customer data can be centralized and risk indicators proactively managed. Digitizing accounts receivable enables companies to avoid major financial risks, such as bad debts or loss of liquidity.
- strengthen customer relations. One of the best practices for managing receivables is to define different payment terms for different customers. Depending on the customer’s age, credit rating or previous payment incidents, the company can propose an adapted credit policy. This creates a relationship of trust, as does ensuring that this policy is communicated upstream (through clear quotations or invoices). Mastering the art of reminders also helps maintain good customer relations!
Conclusion
Trade receivables play an essential role in a company’s financial management, impacting cash flow, financial risk and customer relationships. By adopting a proactive approach to receivables management, companies can optimize their financial health and ensure long-term growth. That’s why it’s vital to pay special attention to this area, and invest in automation and monitoring solutions. You’ll benefit from efficient, diligent accounts receivable management.
With innovative, AI-enabled solutions like CashOnTime’s, your business can continue to thrive in a dynamic and competitive economic environment!
