The simple answer is, yes, accounts receivable is an asset. Ultimately, accounts receivable (AR) reflects money owed to the business by customers for goods or services rendered. The expectation is that the accounts receivable will ultimately be converted into cash within a short period. If they don’t, trade insurance becomes a reliable tool protecting you from delinquent clients. Healthy business operations: Having a
In this blog, we’ll clarify is AR an asset and how you can ensure it improves cash flow and contributes to your company’s financial stability.
Why Is Accounts Receivable an Asset?
Accounts receivable can represent many things to a company, such as:
- Healthy business operations: Having a good accounts receivable balance is a strong indicator that a business has strong sales/service and good customer credit management.
- Liquidity of the business: Accounts receivable isn’t considered cash, but more of a “near-cash” item because the payments are expected soon.
- Future Economic Benefit: The pending increase in cash flow will ultimately benefit the business.
Although accounts receivable can be an asset, it must be managed appropriately. Otherwise, your accounts receivable can move from being an asset to a liability. Let's dive deeper into some ways to manage your accounts and keep your AR an asset.
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How to Manage Accounts Receivable Effectively
Effectively managing your accounts receivables allows you to maintain a steady cash flow, which adds to your company’s financial health. Here are a few key strategies to improve your accounts receivable process and increase your cash flow.
1. Invoice Promptly and Accurately
It’s always in a business's best interest to provide their clients with an invoice promptly after goods and services have been completed. Delays in invoicing can lead to delayed cash flow, and an increase in non-payment, which may bring operational inefficiencies.
2. Set Up Clear Payment Terms
Providing clients with clear payment terms will allow you to accurately manage your accounts receivable. It’s important to provide the following to all your clients:
- Payment terms: Decide the term in which they have to pay their invoice. Clarify if the invoice is due on receipt or if you provide Net 30, 45, or 60 days.
- Offer early payment discounts: This could encourage clients to pay their invoices early and clear out your AR quickly.
- Outline late payment consequences: This could be a late payment fee or interest charged for unpaid invoices. This will discourage overdue balances.
3. Monitor AR Reports and set up Automatic Reminders
Aside from sending out invoices immediately and setting clear payment terms, business owners must review their accounts receivable aging reports and ensure they follow up on overdue invoices. Having an automatic reminder system set up will take the guesswork out of it all. This can be set up to remind clients that their invoice is due soon, and advise them when it is past due.
4. Offering Multiple Payment Options
Variety might not always be the spice of life, but when it comes to your clients, multiple payment options provide them with ease and convenience for settling their outstanding invoices. Providing credit cards, e-transfers, cheques or even setting up a regular client on recurring billing will ensure your company’s balance sheet stays healthy.
As a business, you may have the most effective accounts receivable management plan in place. That doesn’t mean things still can’t go wrong. When it becomes difficult to collect accounts receivable, it can impact your company’s financial health. This is where Accounts Receivable Insurance, also known as Trade Credit Insurance, becomes valuable.
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How Trade Credit Insurance Supports Accounts Receivable
Money owed to your business can greatly impact your cash flow and financial health. Trade credit insurance can protect a business against losses due to the non-payment of customers.
Your company’s accounts receivable insurance allows you to stabilize cash flow and protect your revenue. It can provide the following security:
- Protection against bad debt: If you have a customer who doesn’t pay their invoices or even goes bankrupt, trade credit insurance will ensure the business still receives their payment.
- Enhances client credit management: Trade Credit Insurance will generally conduct credit assessments on your client and can provide some insights if there are risks in working with unreliable clients.
- Supports the growth of your business: Lenders view insurance accounts receivable as an asset. Having trade credit insurance can allow you to expand your business and secure financing more easily.
Secure Your AR Assets with Trade Credit Insurance
Accounts receivable—asset or liability? It only becomes an asset when you rightfully collect what you are owed. Protecting your AR with trade credit insurance ensures your business stays financially secure regardless of client conditions.
Safeguard your revenue and cash flow with a trusted partner—KASE Insurance. We’re an award-winning Toronto-based brokerage that thrives in seeing our clients succeed. With a trade insurance policy tailored to your specific needs, we’ll help you reduce bad debt and grow your business successfully.
Don’t let outstanding invoices turn your AR into a liability. Let's secure your quote today! Call us for a free quote.