Benefits of Managing Your Accounts Receivable
Usually, big companies need to pay their small company suppliers as soon as possible. Do you know that ‘getting paid on time’ is an issue faced by many businesses in Malaysia? This article will talk about the cash flow (Also see Accounting – How to Boost Your Cash Flow) of a business that is driven by the receivables.
You receive revenue when you sell goods or service. This is recorded in your company records as either invoice of cash or sold “on an account.” When goods or services are sold “on an account”, it implies that you have made profits, but you have not collected it— this is known as accounts receivables.
Most business owners know how to differentiate accounts receivable from cash sales (Also see Five mistakes to avoid for business success). Nevertheless, there are some subtle differences in handling the accounts receivable and cash that the majority would slip up upon.
Business only makes profits when they sell goods or services higher than the costs. Congratulations if your business does so! You have to comprehend that profitability, and cash flow are different things. A company can be profitable but at the same time struggling with poor cash flow (Also see How to read Cash flow statement).
Some business owners manage their companies from the “bottom line”. Do you pay your company expenses from the bottom line? Obviously, you should not! You should pay them using the cash flow. This is why handling your accounts receivables can save your company. Take a look at this example:
You run a fruits stall business where your daily sales are RM150 and expenditures are RM75. Assume that the expenses are in cash. You will gain RM75 as profits (Alo see Accounting – The Most Important Part Of The Income Statement).
Here is the distinction between money and receivables
If you sell your fruits on cash, you will make a positive cash flow of RM75 (cash sales of RM150 deduct expenses of RM75). However, if you sell your fruits on credit, you will make a negative cash flow of RM75 (zero cash sales deduct expenses of RM75). Hence, a big profit percentage is worthless if there is no positive cash flow.
In spite of how easy this principle is, the majority of companies failed to interpret their financial statements without guidance from the accounting firm in Johor Bahru. Company owners might make huge profits but face problems to meet their daily expenditures. Cash flow plays an essential role in your business; hence, you can ensure your business to have positive cash flow by handling your accounts receivable well.