It is a normal course of business to extend trade credit and then have to manage accounts receivable. But this comes with inherent risks that can affect the quality of insight you have into your receivables and affect cash flow management. Typical accounts receivable risks include:
- Overstatement of revenue: When revenue is overstated, more receivables are recorded than what customers actually owe. This can happen when accounts receivable record keeping is disorganized or if potentially uncollectible accounts are purposefully not excluded from the accounts receivable total in order to make it look like profits are higher than they actually are.
- Unenforced cutoffs: Cutoffs ensure that financial transactions are accurate and accounted for in the correct accounting period. Without proper cutoffs, accounts receivables and revenue can be overstated.
- Understatement of revenue: When revenue is understated, fewer receivables are recorded than what customers actually owe. This can happen due to an accounting error or when done purposefully to lower taxable income.
- Concentration: When only a few customers represent your accounts receivable, you have a greater risk to your revenue when those receivables are not paid on time or not paid at all.