What are Accounts Receivable (aka Trade Receivables)?
Accounts Receivable (also known as Trade Receivables) are monies owed to you by customers whom you have invoiced for products or services supplied but for which you have not yet received payment. Your Trade Receivables are an asset (since you expect to receive cash from them) and in your accounting software, your total trade receivables will be the balance of your Debtors Control Account on your Balance Sheet.
This should also equal the sum of all of your customer balances in your accounting software.
When you raise a sales invoice, then your accounting software will debit your Debtors Control Account by the gross amount of the invoice. When you receive money from customers then your accounting software will credit your Debtors Control Account by the gross amount received.
Who should be concerned about your Trade Receivables?
Your trade receivables affect many people.
- Your customers need to pay these receivables
- Your collections team needs to chase your customers for payment
- Your sales team may need to know if there is a difficulty in collecting payment from a particular customer
- Your financial director will need to understand the impact of your receivables on cash flow and the company's need for working capital
- Your credit control team need to monitor your debtors (customers that owe you money) to reevaulate credit terms in general, or to specific customers or situations
- Your marketing team should understand the profile of a customer that is more or less likely to present a credit risk so that you are targeting the right kind of customers
When should you monitor your Accounts Receivable / Trade Receivables?
What is right will depend on your business, but here are some suggestions:
- Daily / Weekly
- Rolling average Days Sales Outstanding and underlying trend
- Cash expected in the coming month
- Cash collected vs expected - see the Guage Chart in this report
- Debt write-off / exceptions
- Quarterly / Annually
- Accounts Receivable trends - see page four of this report
- Your collections playbook
- Credit control policies
- Customer acquisition
Why track your Accounts Receivable?
Cash is the lifeblood of your business. If you don't get paid for your services you will go out of business. Tracking your accounts receivable and driving down your debtor days is critical for any company, but especially for a company that is expanding quickly and needs cash to invest in stock.
How should you track your Accounts Receivable?
Your accounting software will have the hard data needed to track your performance, but typically does not present this data in a way that is particularly digestible or actionable. I would recommend a consistent, clear and automated report that is very focused on the activities listed above. In this report, I would expect to see a number of Accounts Receivable KPI's that can be used to track particular aspects of the health of your receivables book and your ability to collect against it.
Learn more about our Accounts Receivable Reporting solution for Sage 50, built using Microsoft Power BI.