Whether you are starting your business or are an experienced business owner, brushing up on the basics is always a good idea. With that in mind, today we discuss accounts receivable, from a basic definition to some examples.
What Are Accounts Receivable?
The most basic definition of accounts receivable (AR) is “the amount of money owed to a company by its debtors.”
Since they can be converted into cash with relative ease, accounts receivable are classified as assets. However, things aren’t always as simple: some clients can be slow to pay their invoices, forcing businesses to wait 30 to 90 days to get paid.
In that case, factoring of accounts receivable can help businesses by turning their unpaid receivables into fast cash (to learn more, see below “What Is Accounts Receivable Factoring?).
What Is an Example of Accounts Receivable?
Examples always help when it comes to understanding abstract concepts like accounts receivable.
So, imagine for example, that a company called A/R services performs maintenance services for a client. These services include things like specialized van maintenance, service calls, and on-site installation.
Since both companies are on good terms, A/R services has extended credit to their client, so instead of requiring payment upfront, they send an invoice like the one below and give the client 30 to 90 days to settle the debt.
In our example, A/R Services enters the above invoice under the section “current assets” on their balance sheet after billing the client. Once the client pays the invoice in full, the money replaces the accounts receivable on A/R Service’s balance sheet.
What Is Accounts Receivable Factoring?
Accounts receivable factoring is the process of selling your unpaid receivables to a company called factor. The factor pays you immediately so you don’t have to wait 30 days or more to get paid, and then collects the payment from your client in exchange for a small fee.
So let’s suppose for example that A/R Services, the company in our imaginary example above, has extended credit terms to their client but can’t wait for them to pay because they need cash.
In that situation, A/R Services can factor some invoices like the one shown above to get cash instantly from the factor. Then the factor proceeds to collect the payment from the A/R Services’ client within the time frame originally agreed upon by the two companies (30 to 90 days).
To learn more about accounts receivable factoring, check out our previous blogs, “How Do You Qualify for Receivables Factoring?” and “Factoring of Accounts Receivable vs. Supply Chain Finance: What Is the Difference?”
ACS Factors: We Turn Your Invoices Into Cash
We are a Factoring company located in Upland, California, with many clients nationwide in the distribution and logistics corridor which includes Ontario, Riverside, Fontana, Jurupa Valley, and Moreno Valley.
Contact us today by email (firstname.lastname@example.org) telephone (909-946-5599), or through our social media accounts on Facebook, Twitter, and YouTube, and start enjoying the convenience of converting your accounts receivable into cash today!