What is accounts receivable – and how does it link to Trade Credit Insurance?

  • What is accounts receivable? Essentially, it’s the money you’re owed for goods or services that you’ve provided, but haven’t yet been paid for.
  • Taking payment in arrears can increase trust from your customers, and assist with financial planning and analysis – you’re always aware of the money you’re due to receive, and when.
  • While there are many benefits of employing accounts receivable processes, there may still be risks. Taking out a protection policy, like Trade Credit Insurance, can reduce risks

When 54% of SMEs expect payments to arrive after the stated due date and only 6% of invoices are settled within 30 days, accounts receivable may become a pressing topic.

What is accounts receivable?

Accounts receivable (or AR) is the balance of money owed to a company for goods and services that have been delivered but not yet paid for.

It’s the money your customers currently owe for things you’ve already done. Each invoice is noted on your company’s balance sheets, and your customers are legally obligated to pay the debt.

Accounts receivable is used when a company lets customers buy goods or services on credit, or pay after the fact. If you deliver a workshop and bill afterwards, that’s accounts receivable. If you ship an item and then send an invoice, that’s accounts receivable.

Paying Amazon today for a new office laptop which you expect to be delivered tomorrow is not accounts receivable. Nor is paying for your coffee before the barista prepares it, expecting it to be ready in three minutes time.

As far as Trade Credit Insurance (TCI) is concerned, accounts receivable is the amount you’ll be covered for. Whether it’s your whole turnover, key accounts, or just single buyers or transactions, TCI will protect you if your customers don’t pay.

What are the benefits of accounts receivable?

Understanding what accounts receivable means could raise another question. Why would a business choose to use an accounts receivable process instead of charging upfront?

There are three main benefits to taking payment in arrears:

  1. Customer service: If customers don’t have to pay in advance, they feel like their interests are being looked after. They know they’ll get what they pay for because they’ve already had it before they pay. It removes that element of risk in the customer’s mind, especially if they’ve never worked with you before.
  2. Planning and analysis: Accounts receivable allows you to know how much money is due to come into your business, and makes it easier to measure your business’ liquidity.
  3. Competitive advantage: Accounts receivable processes may differentiate you from competitors who demand upfront payment. In a competitive industry, this could provide a small but significant advantage.

Accounts receivable processes in practice

If you decide that accounts receivable is right for your business, and this is the way you’re going to work from now on, you might wonder what to expect. Let’s look at accounts receivable in practice for a small business.

Here’s an example of accounts receivable management for a bespoke glass and glazing business:

  • On April 1, the company starts a job to install the glazing for a new commercial building project
  • On April 3, the company finishes the job and sends an invoice to their customer with a 30-day payment term
  • Between April 1 and the day the customer pays, the company has an account receivable worth the value of the invoice, which they record on the balance sheet
  • On May 1, the customer pays
  • The business removes the value of the invoice from accounts receivable and adds it to their cash total

Is accounts receivable an asset?

Yes, accounts receivable is an asset. In finance, a debit is always an asset, and a credit is always a liability. Even before the money is paid, accounts receivable becomes an asset for your business, listed on your balance sheet. If it’s an asset, it can be insured, with the right TCI policy.

What’s the difference between accounts receivable and accounts payable?

Think of accounts receivable and accounts payable (AP) as two sides of the same coin. AR is money owed to you by your customers, AP is money you owe to your suppliers. Instead of being an asset, accounts payable is a current liability.

You can still look at accounts payable in the same way as accounts receivable when it comes to financial planning – knowing how much you’re due to spend, and looking for trends and patterns, but unlike AR, AP isn’t something you can insure.

How Allianz Trade can help you to protect your business

With the question “What is accounts receivable?” answered, your next question may be around what happens if AR goes unpaid. Allianz Trade’s Trade Credit Insurance covers you if a customer fails to pay accounts receivable.

At Allianz Trade, our specialist team is always ready to provide you with advice and support. We’ll help you keep an eye on the creditworthiness and financial stability of your customers – meaning you can work safely with the knowledge that we’ve always got you covered.

For a free credit insurance consultation call our UK team, 09:00-17:00 Mon-Fri.