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What Is Accounts Receivable?

Your business’s financial health is not just about how much money you have in the bank. It’s the interaction of daily, weekly, and monthly transactions that provide an accurate picture of performance. So, what is accounts receivable? Let’s talk about how to get this critical piece of your balance sheet squared away.

Your company’s accounts receivable is made up of money owed to your business.

In other words, I-O-Us, or invoices, hold value. These invoices, or accounts receivable, are legal promises from your customers to pay for the goods or services they have already received. These invoices hold value.

Your accounts receivable include the value of all the outstanding invoices on your company’s balance sheet. Conversely, accounts payable comprise outgoing business expenses you have not yet paid. So, accounts receivable is an asset on your balance sheet because it reflects potential cash flow into your business.

A foolproof invoice tracking process is necessary to keep your accounts receivable up-to-date.

One of the first lessons in business accounting is the significance of keeping meticulous records of all your invoices. Tracking invoices is the first step to take if you want to forecast cash flow, and it ensures you’re always aware of who owes you money and when to collect payment.

Let’s look at some bookkeeping tips that support operational stability and growth.

  1. Generate invoices immediately upon delivering a product or service.
  2. Record details about the transaction, including the amount owed, the amount paid, the outstanding value, and the payment due date.
  3. Enter the invoice into your accounting system under “accounts receivable.”
  4. Regularly review your accounts receivable ledger to monitor which invoices have been paid, which are due, and which are overdue.
  5. Forecast your cash flow and address potential funding or collection issues early on.
  6. Implement a formal payment collection process, including strategies such as sending reminders before the due date and follow-up notices for overdue payments.
  7. Update your accounting records to reflect the payment as soon as you receive it, reducing the accounts receivable balance and increasing your cash or bank balance accordingly.

Calculate the accounts receivable turnover ratio.

The accounts receivable turnover ratio tells you how efficiently your company collects payments. The frequency and value of invoices offer a clear view of your financial and payment collection efficiency over a given period.

A higher accounts receivable turnover ratio means your company efficiently collects unpaid invoices.

Staying sharp on invoice payments ensures liquidity and operational agility. Outstanding invoices become an asset account contributing to your company’s net worth or shareholders’ equity.

Take advantage of technology to stay organized.

Several smartphone apps in the marketplace do simple invoice management, allowing real-time updates on your accounts receivable. Invoice tracking software can help you:

  • Generate invoices.
  • Track payment status.
  • Update invoice details.
  • Store invoice data.
  • Collect overdue payments.
  • Create a profit and loss report.

You want to invest in growth opportunities without jeopardizing your business’s ability to cover its expenses. These are just the everyday accounting tasks that will help you maintain a healthy cash flow.

Effective invoice management goes beyond just keeping track of invoices and payments.

Utilizing cloud-based accounting software for invoice tracking can streamline your business’s finances. A reliable accounting program to track invoices ensures organization, especially during an audit. It’s vital to understand how to keep track of invoices and payments.

Invoicing software automates invoice processing and manages your accounts receivable assets easily.

Automating invoice generation and tracking payments makes monitoring your accounts receivable revenue easier than ever. Features like recurring invoices and early payment discounts can incentivize timely payments.

Accounts receivable is one example of the importance of meticulous record-keeping.

Schedule a discovery call today, and let’s ensure your business is primed for growth.

Talk soon,
Jeremy A. Johnson, CPA

Meet the Author
Jeremy A. Johnson, CPA, is an expert in strategic tax planning, accounting, CFO services, and thought leadership.

Jeremy writes for small business owners who need actionable information on tax strategy, efficient accounting practices, and plans for long-term growth.

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