Accounts receivable are amounts owed to the business from customers. Credit is extended by the owner to entice the sale of the product or service provided. Customers typically have 30 days to pay the amount due. Some customers are extended additional time to pay based on their history etc.
A tool used by a developer, contractor or homeowner to keep the primary party committed to getting the project completed is called ‘retainage’. In effect, retainage means to withhold a small percentage of all payments made until all the work is done. The idea is prevent the contractor, subcontractor or vendor from earning their respective profit until they have completed their agreed upon service.
The majority of activity ratios measure the ability of the company to turn assets into earnings. All businesses utilize a simple principle, buy an asset at a low price and sell it at a higher price. Even service based businesses do this. Labor is purchased for a certain value and then sold for a much higher price. Retail businesses purchase inventory and then turn around, mark it up and then sell it to make a profit. There isn’t any business out there that doesn’t exercise this basic business principle.
Tolerating non-payment is simply a part of doing business. To assist in measuring this dollar value, the accountant must estimate bad debts. This is the fifth part in the series of bookkeeping estimates within the advanced skills section of bookkeeping.
One of the activity ratios in business is the receivables turnover ratio or rate. This ratio measures the frequency of collecting the entire balance of accounts receivable during a standard accounting year. The ideal turns rate is twelve with a higher value indicating an aggressive collection process. A lower value is a warning about accounts receivable management.
There is no single management style to address the multitude of working capital cycles existing in the various business sectors and the underlying industries. Taking raw resources and turning them into consumer goods has different time frames depending on the item produced. In addition, the sales period varies from product to product. Compare the production and sales cycle for an automobile to that of ice cream.
In small business, cash is almost always the number one issue. There is simply never enough. This is primarily attributable to growth. Growth requires both physical assets to produce more and expansion of accounts receivable. Technically, the expansion of accounts receivable is the economic equivalent of lending cash.
Of all the assets in business cash is the most valuable and coveted. Keeping track of how much is available and where it goes is the responsibility of the bookkeeper. Often owners have no idea of how much they really have nor how much of the existing cash is earmarked for certain items.
In my mind accounts receivable management is the highest priority duty of a bookkeeper. Cash is the lifeblood of small business. Most small businesses are thinly capitalized and depend solely on collecting cash to remain solvent. Collection of money is a process, if done daily the bookkeeper can maximize the efficiency of collecting money for the business.
Generally Accepted Accounting Principles (GAAP) advocates using the accrual basis of accounting over cash basis. The difference between the two methods is important to understand as a bookkeeper.
One of the industries in the transportation sector is materials hauling. This is your dump truck industry. All of us see these trucks out on the highway usually hauling gravel or dirt. To profit well, efficiency is the primary business principle. Lack of efficiency drives up fuel costs, loss of time in hauling; increased maintenance and repairs, and finally customer dissatisfaction. This article is an introduction to this industry as a part of the transportation sector of our economy.
