Accounts Receivable Collections

Collection of accounts receivable is a big function in any business. The main activity of a manufacturing business entails purchasing raw materials and consumables, producing goods with them, and then selling these goods. Likewise, in businesses offering services, it is recruiting personnel required to provide the services, and then entering into contracts to provide such services. All these activities are oriented towards generating money for the business owners. Some clients pay cash immediately. There are other customers who take time to pay monies. This category of clients is referred to as accounts receivable as monies are receivable from them.

There can be a mismatch between accounts receivable and collections. Unlike inventories, vehicles, implements, machinery, etc., the possession of which remains with the business owner, in accounts receivables the business owner only has a small piece of paper from the client acknowledging that the goods have been supplied to him, and that payment would be made in due course of time. Recognizing these accounts receivable as assets at their book value may therefore lead to problems if some of these debts become bad or the client looks for any bargain.

There are repercussions for delay in accounts receivable collections. Monies invested in the business get locked in these accounts receivables. In process, cash flow is affected and the business does not have free hand to purchase any stocks, or pay for other regular expenses. This means the business enterprise has to borrow for regular requirement. Any such borrowing is called working capital borrowing. It translates into interest expense for the business.

But business enterprises have to offer credit period, as there is competition in the market, and such credit can affect the decision of the client. Therefore, when businesses offer their quotations, they specify the credit period that would be allowed. However, not all clients adhere strictly to these terms, and pay the monies in time. If the business enterprise is looking at the client for long term, then additional period of credit may be involved.

In general though, businesses have accounts receivable collection policy in place. Large businesses have accounts collection personnel. The size of accounts receivables collections department varies as per the size and nature of the business. Therefore, in case of consumer goods, or financial products business, where installments are to be collected every month, the department collecting accounts receivables is fairly large. There are also laws governing the process of accounts receivable collection. Threats, and physical assault cannot be used for collection, irrespective of the size of the debt or the period of delay in payment of debt. In addition, there are laws of limitation. Therefore, collections of accounts receivable should be within this period of limitation.

Accounts receivable management is therefore a crucial part of any business and it does require some skills. Factoring is one option available to businesses, and banks do lend monies on specific percentage of accounts receivable. At times offering discounts may lure some debtors to pay monies promptly. Even then, taking help of professional accounts receivable management companies can result in substantial savings as they could point out which client is likely to become delinquent and prevent further supplies to such client. Such accounts receivable management businesses have data from various sources such as credit rating agencies, banks, and other businesses. Therefore they can monitor any such credit sales and help businesses in reducing losses. Such accounts receivable management companies may also offer consultancy services for setting up any such accounts receivable collections department or determining the extent of discount that can be offered for collecting accounts receivable.