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Business owner is a little overwhelmed by the concepts involved in dealing with accounts receivable and wants to know why they are such a big deal. “1 just give my good clients credit and they pay me back as soon as they can. Occasionally some take a little bit too long or can’t pay their entire bill, but that’s just the way business works. Try and Convince that proper management of account receivable is important to business survival.
Expert Answer
Solution: Account receivables is one of the key current asset of the company which shares a significant portion in the balance sheet but it is also one of the deceptive item. It is deceptive because it acquire a space in the current asset column of balance sheet with a particular value but thay value may not be real on grounds of non payment by the account receivables. Proper management of account receivables are significant for business survival on the following grounds:-
1. It will change and bd affect the liquidity position of the company i. e. non payment of account receivable leads to reduction in the value of current assets, it will make difficult for the company to make payment to short term financial obligations (Liquidity crisis)
2. Since, Credit sales are represented as revenues but non payment will leads to reduction in revenues in real manner.
3. It will also effect the capital efficiency of the company i. e. mismatch between debtor turnover ratio and creditor turnover ratio. In other words, late payment or non payments by account receivable and early payments to suppliers will lead to cash crunch.
From the above arguments, we can state that Management of accounts receivables is important for business survival.
