“Account Receivable” … Asset or liability?
Factors love account receivables – but so do collection companies. Asset based lenders are all over the place with them and banks can be anywhere from warm to ice cold … so why is there a difference in perception?
Account Receivable as an asset: When are accounts receivables a desired asset?
- Account Receivables – backed by an invoice – must clearly define a completed transaction
- The invoice must clearly define payment terms … and collection terms if the buyer doesn’t pay
- Smartly: The invoice is backed by a purchase order that is signed by the buyer of the goods and services
- A buyer/receiver of goods must be happy with the goods and acknowledges receipt of the goods
- A buyer/receiver of the goods must be able to pay for the goods
Account Receivable as a liability: What makes an account receivable a liability?
- If, when you create an account receivable, you have taken on debt or obligations that you will have to pay in the future – it can be a liability. How about vendors? Payroll? Shipping? Installation?Utilities? Etc.
- If problems with the product/service delivery may motivate the customer to hold back payment or force you to incur additional costs
- If the customer cannot pay or has incurred an event to keep them from paying … whose holding the bag now?
So … how do we make sure that an account receivable is an asset and not a liability so we don’t end up like our pennilless buddy here?
- Clearly define purchase orders/contracts
- Ensure products and services were received and customers are happy
- Credit check your customers … even the “old reliable” ones
- Watch for changes in customer payment habits …
- Maintain solid quality control … and know your product intimately
What do companies do that create account receivable and incur a liability … ?
- Poor documentation of sales and/or terms of sales
- Selling to anyone that wants to buy with no credit checks
- Not following up sales or ensuring quality control
Why do factors love account receivable that fit the ‘asset’ definition? They are great collateral and they’ll capitalize your company if they are good.
Why do factors pall at the thought of accepting account receivable that fall into the ‘liability’ definition? They know the odds are that these will end up in collection.
My questions to you:
- Why should you set yourself up to receive sixty or seventy cents on the dollar for a slow paying account receivable when you can get full value because you didn’t do that little extra?
- Why should you risk your business for the sake of selling to someone that won’t pay you?
- Why would you not document your dealings or provide good quality control with your customers?
Why do I write this? I consult with companies on how to factor nationwide and the above principles are what helps small companies grow if they are followed and sometimes bring large companies come to their knees if they don’t. That said here are “Ten questions you should ask about factoring” if ever you’re considering factoring or call me @ 1-877-813-2923 and let’s talk.
That said one of my favorite questions to ask some business owners I meet? “Why are you investing in your own demise?”
Sound harsh? It’s not as harsh as someone losing their business … or worse!
Take a step back and look at how you’re doing business and then be smart and build your company on assets using practices that keep them from becoming liabilities … because we all know where the wrong road will lead you!