by steveyj69 » Sat Dec 05, 2009 07:24:40 AM
Accounts receivables are essentially giving credit to your customers – here is how. You make a product and ship it to a customer. This customer agrees to pay you in 30 days – thus, you will not get the cash payment for 30 days. You have now created an accounts receivable or invoice. This will go on your balance sheet as an accounts receivable and your income statement as a sale – but, your bank account will not get the money until the customers actually pays you cash. You have essentially given this customer 30 days credit to pay.
The problem with these is that you have already spent money (actual cash) in getting the materials to make your product as well as all the other costs in packaging, labor, shipping etc. yet you have to wait to get the cash from your customer.
On the other hand and a great way to manage your accounts receivables (A/R) is to ensure that you are not paying for any of this until you get paid – thus set up the accounts receivable from the other way where you are the customer and you have 30 days to pay your suppliers – thus, you get the credit and time to collect from your customers before you have to pay your suppliers.
If not properly managed, you could get tons of new customers – growing your business – but without cash – you will grow yourself broke.