Financial Reports: How to Read the Balance Sheet for Accounts Receivable
Any company that allows its customers to buy on credit has an accounts receivable line on its balance sheet. On a financial report, accounts receivable is a collection of individual customer accounts listing money that customers owe the company for products or services they’ve already received.
A company must carefully monitor not only whether a customer pays, but also how quickly she pays. If a customer makes her payments later and later, the company must determine whether to allow her to get additional credit or to block further purchases.
Although the sales may look good, a nonpaying customer hurts a company because she’s taking out — and failing to pay for — inventory that another customer could’ve bought. Too many nonpaying or late-paying customers can severely hurt a company’s cash-flow position, which means the firm may not have the cash it needs to pay the bills.
Comparing a company’s accounts receivable line over a number of years gives you a good idea of how well the company is doing collecting late-paying customers’ accounts. Although you may see a company report positive sales numbers and a major increase in sales, if the accounts-receivable number is also rising rapidly, the business may be having trouble collecting the money on those accounts.