Question

How do you think a business would do if they had poor AR accounts? I used my husband's former employer as an example, where they let customers come in and buy now but pay later, do you think that is a bad move on the company?

Answer 1

Answer :

Part A

A company with poor Accounts Recievable account will incur huge losses in its business.

Major problems include ;

1)Operating Losses : with lack of proper accounts on recievables the business will have more of bad debts (debts unpaid) as the owner is not able to identify who has paid and who has not. The unidentified debtors will tend to skip the payment as the have not been reminded properly. The profit and loss will reflect more and more of bad debts and the balance sheet will weaken as the propritor has less control over recievables

2) Loans and Advances : To apply for a loan based on recievables you will have to provide detail list of your debtor which the business does not have.

3)Liquidity : As the debtors go unpaid the liquidity of business will start coming down and fresh equity has to be pumped into the business for stable running.

Ultimately all of this lead to the closure of business.

Part B

Letting customers to buy now and pay later is actaully good for business.

Because this will enable the business to have more clients than usual and much more frequent clients. As the payments are deffered the clients will prefer to repeat their purchases .

Major advantages are:

I) More Clients

II) Regular sales

III)Bigger balancesheet as the recievables and inventory increases.

But the owner will have to maintain a good level of control over the recievables. Proper accounts and proper reminder systems should be kept . A minimum provision of atleast 3% should be set for bad debts. The sale price of the products should be adjusted in this way.

Credit system should be allowed only for regular customer and not for every customer.