Net accounts receivable is the total of a company’s accounts receivable minus bad debts, indicating the amount of current accounts receivable that a business expects to collect. A high percentage indicates good financial health, while a low percentage requires identifying outstanding debt and taking steps to pay it off. Companies aim for a low bad debt ratio and may implement stricter credit scores or require old balances to be paid off before extending credit.
A net account receivable is the total of a company’s accounts receivable, minus any such accounts receivable that are considered bad debts. From this perspective, a net account receivable can be defined as the amount of current accounts receivable that a business anticipates will eventually be collected. In most cases, this type of accounting figure is presented as a percentage in official company documents and press releases.
Identifying net accounts receivable is important to understanding the financial health of a business. Depending on the exact percentage, the account receivable may indicate that the business is doing well, or that certain issues need to be addressed before the stability of the business is weakened. A high accounts receivable, such as 95%, would indicate that the company is in good financial condition. Conversely, if the current accounts receivable is less than 80%, the owners and officers would want to identify the reasons for the relatively high amount of bad debts and determine what can be done to improve the accounts receivable turnover ratio in the current period. future.
Businesses of all types and sizes strive to generate the highest percentage of net receivables possible. It is not unusual for companies to set a goal of keeping the bad debt ratio to no more than 2%. This in turn would mean that the business enjoys a 98% net receivable, and is handling the task of collecting outstanding invoices with great efficiency.
When a net account receivable percentage falls below what the company considers an equitable amount, steps are typically taken to identify what type of debt is outstanding, how long that debt is past due, and what can be done to pay off those obligations. of debt. In some cases, this involves turning over seriously overdue customer accounts to a collection agency. Since agencies of this type typically retain a portion of the funds they collect on behalf of clients, this means that the original owner of the debt will likely write off any difference between the amount received through the collection agency and the balance that It is shown in accounts receivable. An alternative approach is to sell the debt directly to another company for a small percentage of the total amount owed, pay off the difference, and wipe that amount out of accounts receivable entirely.
A less-than-desirable net receivable can also cause changes in how a business extends credit or how specific customer accounts are managed. The company can implement stricter credit scores, making it easier to spot potential customers who are less likely to keep their accounts current. For older customers who are in arrears, the company may require those customers to pay off old balances before receiving access to additional goods or services. In some cases, a seriously delinquent customer may be abandoned entirely and not allowed to do business with the provider again.
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