Accounts receivable explained

Accounts receivable is money owed to you by your customers for merchandise purchased.

Suppose you are a wholesaler who ships merchandise in truckloads to your customers.  You ship goods to customers’ loading docks, where workers can unload the trucks.  Here’s the problem: those workers usually can’t pay you for the merchandise.  They are truck-unloaders, not check-writers-and-signers.  Therefore, you have no choice but to extend credit to your customers, and wait until the paperwork makes all the way to your customer’s check-writers-and-signer, who mail you the check.

Coca-Cola by rick, on Flickr

Furthermore, because your competitors extend credit to your customers, you, too, may be forced to do the same.  Putting a customer on “C.O.D.” (“Cash on Delivery”) is often like telling that customer to use a different supplier.

Accounts receivable terms are typically described like this: 2/10 net/30.  This means that the customer is entitled to a 2% discount if they pay within 10 days, and the full balance is due within 30 days.

For many businesses, accounts receivable is a necessary evil.  They need to extend enough credit to keep their customers happy and to sustain their sales.  However, they should avoid lending to credit-unworthy customers, and try to collect accounts receivable as quickly as possible.