Receivables are defined as amounts owed to a business and are therefore recorded and classified as asset accounts. Although it lies within the asset side of the accounting equation, it does not guarantee that their presence is all for good. At times, even they can bring in dilemmas and significant damage to the business. How?
- Collection is taking too long.
Receivables are debts owed to the company primarily by its customers but may also be from other parties. This is what makes it an asset account. However, the very challenge that comes with them is the fact that they are not immediately recognizable and are not liquid per se. They are not cash and thus may not be used to pay for the various aspects of trade and operation.
Collection is an integral part of receivables and a solid system must be present to ensure that everything is timely and on schedule. Still, there will be cases when the recognition of such collections is going to take long. Depending on the credit terms, it can take a few weeks, to several months or even years to garner full payment. This opens up doors for liquidity and cash flow issues.
- Bad debts are on the rise.
Another risk that companies tackle in the face of having receivables is the possibility of bad debts. This is when debtors or owing parties fail to pay at all. Delays are by themselves already detrimental so how much more if there is a complete default? Depending on certain situations, the company may seek for charges against the defaulting party but these come with costs to the business’ part too. Furthermore, these bad debts may be written off and recorded as losses. Yikes!
- Cash levels are dwindling.
Another issue that receivables are likely to have is their unattractive effect on cash flow. Sales and assets may look fine but cash doesn’t. Working capital is strained and there isn’t enough available and immediately usable resources to use on corporate expenses. Again, there lies a liquidity issue and when taken out of hand may pave the way for an insolvency scenario, being one of the worst aftermaths that a receivable problem can bring about.
How does one avoid all these? I would suggest the proper use, facilitation and planning of receivables throughout every fiscal year.