An accounts receivable reserve is a reserve account that helps offset losses from non-payment of outstanding invoices. Historical data or invoice due dates can determine the amount allocated. The reserve helps companies avoid financial difficulties and pay vendors without fail. Guidelines for using the funds vary, but replenishing the reserve is possible with payments received from collection efforts or customers.
An accounts receivable reserve is a type of reserve account created to offset losses that occur when customers fail to remit payments on outstanding invoices. The idea of the reserve is to prevent the company from experiencing serious financial difficulties due to non-payment. A reserve account of this type can be used to offset the impact of bills left over when a customer files for bankruptcy, goes out of business, or simply doesn’t pay, and the balance is transferred to a collection agency.
There are a number of strategies that can be used to determine the amount of funds to allocate to an accounts receivable reserve. One of the most common approaches is to make use of historical data involving both the percentage and actual amounts of invoice defaults that occurred within a given time frame. A slightly different approach calls for basing the amount on invoice due dates, with the reserve balance based on the sum total of invoices that are older than 90 days. Choosing the best approach often depends on the circumstances of the business itself and how easily the business could recover if old invoices are not paid in full.
The main benefit of establishing and maintaining an accounts receivable reserve is that the company is somewhat insulated from the deleterious effects of a customer’s failure to remit payments on outstanding invoices. By having reserves available, the business can offset those losses and continue to make payments to vendors and suppliers without fail. As a result of having sufficient funds in reserve, it is possible to avoid incurring late fees and other penalties on accounts payable that would only increase the company’s debt obligations, making it even more difficult to remain financially stable.
Guidelines for when to use the funds in an accounts receivable reserve will vary. Some companies require delinquent customer accounts to be submitted for collection before reserve funds can be used to offset losses. Other companies employ the practice of withdrawing funds from the accounts receivable reserve when invoices reach a certain age level, such as 120 days after issuance. In the event that funds are received due to collection efforts or a customer submits a payment after the account has reached the expiration limit, those payments can be used to replenish the reserve, allowing the company to maintain This type of savings for the future.
Smart Asset.
Protect your devices with Threat Protection by NordVPN
