Account receivable (AR), to put it simply, measures the amount of money clients owe to a business for goods/services already provided. It is a component expected in the future that will increase a company’s asset, which presented on the balance sheet.
Nonetheless, most firms do not expect to collect 100% of account receivable, as the clients could default on payments, forcing the business to accept a loss. To account for this risk, accountants refer to this portion as the allowance for bad debt. Despite this, the company could benefit from selling goods on credit as it may encourage more sales and also reduce transaction costs, given the clients are regular and reliable. The sooner payment collections are, the lower the cash flow stress the business will endure, as well as default risk. The quality of account receivable contributes to the overall financial health of the firm.
Therefore, to properly monitor account receivable, is a crucial component of mitigating risk. One aspect of assessing the quality of AR is to analyze debtor customers by industry sector. If the debtor clients are concentrated within a particular industry, the business will be more vulnerable to default risk. Another more specific but time-consuming ways to analyze AR is to investigate the extent to which each of the customers is overdue on their payments. Typically, the clients are incentivized to settle the payment within 30 days and 60 days upon contract signing. Subsequent legal actions could be taken usually after 15 days past settlement date.
Once the account is being determined as a bad debt (which would require a board decision announcement), having the evidence of necessary steps were taken to recover the debt (correspondence regarding payments) is essential, as it could at least help the business to reduce loss to a certain degree. For example, the bad debt amount can be categorized as “expense” offsetting against revenue during the tax filing, consequently reducing the amount of income tax liability.
Keeping track of the receivable accounts and following up according to the payment schedule of each client is time-consuming. STAR Accounting & Consulting is dedicated to being the guardian for foreign businesses to navigate the Chinese market. With a profound understanding of how crucial AR quality is, we will assist you with account receivable analysis, payment follow up, and correspondence records. There will be no one better than a trusted advisor who is managing your business financials to take on the responsibility.
Established in 2007, STAR has assisted 300+ clients from five continents with market entry, provide a one-stop solution to your China business vision: incorporation, accounting outsourcing, tax advisory and HR services. For more information regarding AR management service or business consultation, please contact Nancy Chen on email@example.com.
Established in 2007, STAR Accounting & Consulting is a comprehensive accounting service firm providing corporate registration, bookkeeping, tax advisory services. We are the Vice President firm of the Shanghai Accounting and Bookkeeping Association, and the member of IECnet (an international accounting alliance network).