Accounts Receivable Need And Importance Of Accounts Receivable

Accounts Receivable, being also known as debtors, are the assets of a business entity. They are the dues from the credit customers or clients. Effective management of Accounts receivable is of great importance as it, by increasing cash flows, leads to sound financial health and flexibility of a business entity.

There are various reasons for setting up Accounts Receivable in a business organization: When goods or services are provided on credit, a business records receivables that in turn increases the revenues. The objective is to survive in the market or to increase the sales. Besides, there are times when a business entity,

depending upon the goodwill of the clients or customers, is willing to help them and hence it, by providing goods or services on credit, establishes receivables and maintains it in accordance with the established policies. In short, establishing and managing accounts receivables is a universal practice.

There is day to day requirement of funds for a business entity to meet the routine payments. It may need to keep aside certain amount of money for unforeseen events. Or it needs to purchase raw materials or to pay wages etc. In such times accounts receivables, having been regarded to be the part of working capital, play a vital role as the money from the receivable can be converted into cash. In this way, the concept of working capital should be easily understandable. The term working capital refers to the excess of the current assets over the current liabilities.  Current assets are those that are converted in to cash in twelve months period. They are:


Cash, Receivables, inventories, marketable securities and prepayments. Current liabilities are those that are to be settled in twelve months period. Current liabilities are: Accounts payable, unearned revenues and wages payable. However, managing working capital efficiently, a Financial Manager ensures whether sufficient funds are available for its day-to-day requirements; so as to safeguard the company against possibility of insolvency.

Finally, a periodic review of accounts receivable as well as the frequency of the payments must be ensured with proper follow up methods so that the dues may be collected timely and regularly. If the dues from the customers or clients are not received on time, the situation may lead to insolvency. Also, there is a need to set up policies in relation to accounts receivables including credit terms and standards that the collectability of revenues may be maximized and accounts receivables may be managed efficiently.

Written By:

K.A.Fareed (Fareed Siddiqui)
Writer, Trainer, Author, Vb/Vba Developer
BBA; MBA-Finance; M.Phil-Financial Management; (PhD-Management)
MA-English; M.Phil-English
Pursuing CMA-USA
Individual Member of Institute of Management Consultant of India

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Article Written By FAREED SIDDIQUI

I am an Individual Member of Institute of Management Consultants of India. I am a Professional with a high creative capability based on Business, Management, Financial Accounting, Management Accounting, Finance and Management Consulting Field. I impart part time training and development programs. I write professional articles on business & management, business English and Software Engineering.

Last updated on 08-07-2016 163 0

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