We’ve all heard about it more than once, but do we actually know what is Accounts Receivable? Should we even care what it is they do? Well, since AR is the department responsible for collecting incoming cash to your business then, yeah, you should probably care quite a bit!
What is Accounts Receivable?
Accounts Receivable literally means money that has not yet been received, such as something bought on credit or something that is billed, basically any payment method except cash! You’ve probably used Accounts Receivable without even realizing it before. If you work a job that earns a paycheck, then that is an example of expecting to be paid for your services, just as a business expects to be paid for the goods and services they provide! It’s a lot simpler when you think of it in these terms.
So why does it matter if you have an AR department handling your payments? Well, in this day and age, most people carry more plastic than cash and rely heavily on credit systems. It’s also important to understand that while Accounts Receivable isn’t tangible cash yet, it will be once collection is made. This is an example of cash flow. Having a steady cash flow means you are making sales and your business is receiving profits. For example, if you sell a product your money went into making that product and distributing it. You sell it for a higher amount than you put into it. You receive this money from the distribution of the product and can then divide the profit into payroll and investment in more products to sell. The cash flows from you to the buyer and back to you again in a cycle. This is the sign of a healthy business.
So doesn’t having an intangible payment like Accounts Receivable put the company at risk of not getting paid? Well, there are certainly risks just like any business endeavor, but Accounts Receivable are guaranteed since there is a legal obligation for the money to be paid to you. If payment is not made, you can take the matter to court to settle the balance due.
All in all, Accounts Receivable is a very important part of any business that should not be taken lightly.
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