Question

Research and discuss how you think accounts receivable would impact a business you would like to open or work for in the future. Be sure to include in your discussion how you think uncollectible accounts could impact your business.

Answer 1

First of all let's understand what account receivable means. Account receivable is the accounting term used to refer to the amount that the business should receive from its customers for the goods/services provided by the business. It basically represents amount recoverable from the customers on account of a credit sales. It is an asset for the business as it represents the amount recoverable and receivable by the business in the future.

Now that we have understood what account receivable means, we will discuss the impact that it has on the business. Account receivable is the lifeblood of a company's cash flow. It is a form of invested capital where your money is stuck and you are waiting for it to be released so that you can invest it somewhere. It is very important to track accounts receivable and regularly follow up with the customers for recovery of the amount as if you do not do that, you might loose track of the sales made and you might end up providing the product for free. It is also very important because account receivable can break or define your cash flow cycle. Healthy and regular cash flows are always important for a company to meet it's current obligations.

In the modern world, it is expected from any organization in the market to provide at least some credit period to the customers for making the payment. However there have also been a lot of cases where large organizations have shut down because the credit period set was too much and they could not meet their present obligations. The credit period provided to the customers has to be related with the credit period allowed to us by our suppliers. Say the credit period allowed by our suppliers to us is 30 days and we are allowing a credit period of 60 days to our customers, the business is bound to fail as the company will not be able to meet its payment obligations and will go bankrupt.

Uncollectible accounts also known as "bad debts" are even more harmful for an organization. It represents account receivable which are no longer recoverable, i.e., cost has been incurred to provide such goods/services with no return from the same. It is basically a dead loss for the company. For this, the company needs to have solid contracts with the customers which state that in the case of any defaults on part of customers, a certain penalty with the original recoverable amount is payable by the customer.

Now that we have discussed how account receivables and uncollectible accounts can severely impact our organization, let's also discuss a few steps that can be taken to avoid such sever impact. First of all, a solid internal control process should be created. It means that no products shall be sold until a contract has been entered into with the customer. Also documentation is key. Without documentation, it becomes very difficult to prove the default of customer in court. Another step which could be taken is taking a customer confirmation for the delivery of product/services.

I would like to conclude this discussion by saying that the money collected from account receivable is the food that fuels all the actions of an organization. A healthy and a steady cash flow is what may break or make it for the organization's future success.