When you’re trying to determine what money is coming in compared to money you need to pay out, you’ll need to review short-term assets against short-term liabilities. This helps you understand where you need to make changes in your policies and procedures to ensure your business stays cash flow positive.
Accounts Receivable s vs. Accounts Payable
Accounts receivable is money owed to your business for purchases made by customers, suppliers, and other vendors. It’s an asset. Accounts payable includes all short-term obligations owed by your business to creditors, suppliers and other vendors.
As you review your balance sheet, you may decide to change your terms or policies if your business isn’t thriving with your existing procedures. You can get an in-depth look into your accounts receivables with the Accounts Receivable Aging Report. Be sure to look closely at your terms and existing customer base and review the following:
- Terms—What types of terms have you given customers? Do you give them a 30-day window to pay or is payment due immediately.
- Customer behavior—Do some customers pay on time while others seem to take forever?
Just as you review your customer’s terms and behaviors, you should also take the time to review your supplier’s terms and behavior drilling down to the Accounts Payable Aging Report.
Notes Receivables vs. Payable
Many small business transactions are finalized with credit. Often times smaller business lend or receive money with promissory notes where one person promises to pay the other one back at a certain time under certain interest terms.
Notes receivables that are due within one year are current assets. These are promises to pay you for money you’ve loaned to others. Notes that cannot be collected on within one year should be considered long-term assets. Notes payables represents money owed on a short-term collection cycle of one year or less. It may include bank notes, mortgage obligations or vehicle payments.
As a small or mid-size business, notes receivables are likely to be promissory notes or employee advances. Perhaps you’ve given a customer a loan because they couldn’t make the payments on the product or service they bought from you. To avoid legal fees or the embarrassment of a collection agency calling on them, they agreed to transfer their delinquent accounts receivable balance to a promissory note. (Note: I don’t advise that you do this without the counsel of your attorney)
Notes payable could be a line of credit, accrued payroll and withholding taxes and the current 12 months of a vehicle loan that’s setup as a contra account to separate the current balance of a long-term note. The remaining balance of the loan will be found under long-term payables.
If you discover that you have a large number of outstanding notes receivable, you should consider taking measures to reduce the amount of write-offs you may see as the debt becomes uncollectable. You may even want to put a policy in place to ensure that you don’t lend out more than your business can afford to lose.
You may also want to create an account called Allowance for Doubtful Accounts. This account can accrue a bad debt balance that can be used to write off any notes payable that later become uncollectible.
Timing is important with receivables and payables. You could run into serious cash flow issues if you have a ton of money coming into your business in the next 60 days, but owe your suppliers money in the next 30 days. Timing is critical in everything, but especially in accounts and notes receivables and payables.