Receivable

Definition

A receivable, also known as an account receivable, refers to the money that a business is owed by its clients for goods or services rendered. It is considered an asset on a company’s balance sheet, as it represents an outstanding claim for payment. Receivables are usually recorded as short-term assets, as payments are typically expected within a year.

Phonetic

The phonetic pronunciation of the keyword “Receivable” is: /rɪˈsiːvəbəl/

Key Takeaways

Definition: Receivables, also known as accounts receivable, are amounts owed to a business by its customers for goods or services provided on credit terms. These are considered short-term assets and are expected to be collected within a specific period, typically within one year.
Management: Proper management of receivables is crucial for a business’s financial success. Key aspects of managing receivables include setting appropriate credit terms, monitoring credit risk, and timely follow-up on overdue payments to minimize the risk of bad debts.
Metrics: Various metrics can be used to assess receivables performance, such as the average collection period, which measures the average time it takes to collect payments, and the accounts receivable turnover ratio, which assesses a business’s effectiveness in converting receivables into cash.

Importance

Receivables are a crucial aspect of business and finance as they represent the outstanding amount of money owed to a company by its customers. Essentially, receivables are a form of credit extended to customers for goods/services provided, and upon successful collection of these funds, they contribute significantly to a company’s cash flow, working capital, and overall financial health. Additionally, receivables signal the effectiveness of a company’s credit management policies and customer relations, indirectly impacting its reputation and trust in the market. By monitoring and managing receivables efficiently, businesses can ensure timely cash inflow, minimize credit risk, and maintain stable financial growth.

Explanation

Receivables serve as a vital component within the financial operations of a business, playing a crucial role in managing cash flow and financial sustainability. Essentially, receivables denote the money owed to a company by its customers for goods or services provided on credit. When companies extend credit to customers, they are allowing the customers to purchase goods or services immediately, with a promise to pay later. This fosters increased sales and strengthens customer relationships, enabling businesses to maintain a competitive edge in the market. The management of receivables is an important aspect of a company’s financial strategy, as it helps to optimize cash flow and mitigate credit risk. By closely monitoring and analyzing receivables, businesses can identify the efficiency of their credit and collection processes, and take corrective actions when necessary. Timely collection of receivables is crucial for maintaining a healthy cash flow, as it enables businesses to meet their financial obligations and invest in growth opportunities. Moreover, effective receivables management also aids in assessing customer creditworthiness and minimizing the risk of bad debts, thus contributing to a company’s overall financial stability and success.

Examples

1. Medical Billing Receivables: In the healthcare industry, once a service has been provided by a hospital or a doctor’s office, they send out an invoice to the insurance company or the patient for the amount owed. These invoices are considered accounts receivable, as they represent money that is expected to be collected in the near future 2. Retail Store Credit Sales: When a customer purchases an item from a store using a store-branded credit card or in-house financing option, the amount owed by the customer is considered to be an account receivable. The retail store expects to receive this payment, usually within a specified time frame, such as 30, 60, or 90 days, depending on the payment terms agreed upon. 3. Subscription Service Receivables: Companies that offer subscription-based services, such as a monthly magazine, streaming service, or membership, often bill their customers regularly for continuing access to the product or service. These regular billing cycles generate accounts receivable, as the customers are expected to pay their invoices within a specified time frame.

Frequently Asked Questions(FAQ)

What is a receivable?

A receivable, also known as an account receivable, is a financial term that refers to the amount of money owed to a business by its customers for goods or services provided on credit. It is considered an asset on a company’s balance sheet.

How do receivables work?

When a company provides goods or services to a customer on credit, the customer becomes a debtor of the company, owing them a specific amount of money. This is recorded as a receivable on the company’s financial records and will be collected at a future date, usually within a predetermined period.

What are the different types of receivables?

There are two primary types of receivables: trade receivables and non-trade receivables. Trade receivables arise from regular business operations, such as sales of products and services on credit. Non-trade receivables come from transactions outside the company’s regular operations, such as loans given to employees or outstanding insurance claims.

How do you record receivables in accounting?

When a sale is made on credit, businesses record the transaction using double-entry bookkeeping. They debit (increase) accounts receivable and credit (increase) the revenue account. When the payment is received, they will then debit (increase) the cash account and credit (decrease) the accounts receivable account.

Why are receivables important for a business?

Receivables are essential because they represent the future cash flow that a business expects to collect from its customers. Effectively managing receivables ensures sufficient cash flow, helping a company meet its financial obligations and reduce dependencies on external financing.

How can businesses manage their receivables?

Businesses can effectively manage their receivables by implementing robust credit control procedures, setting clear payment terms, monitoring outstanding balances regularly, conducting credit checks on new customers, and following up on late payments promptly.

What are the potential risks associated with receivables?

The main risks associated with receivables include bad debts (when customers fail to pay the amount owed), liquidity risk (inability to convert receivables into cash quickly enough to meet financial needs), and credit risk (the potential for a debtor’s failure to meet their obligations).

How can a company estimate its bad debts?

Companies often estimate their bad debts using historical trends, customer creditworthiness, and industry standards or by applying an aging analysis to their outstanding receivables. They can set up an allowance for doubtful accounts, which is a contra-asset account that reduces the total receivables on the balance sheet to reflect the expected uncollectible portion.

Related Finance Terms

Accounts Receivable
Invoice
Trade Credit
Collections
Bad Debts

Table of Contents