Accounts receivable risks include slowing the cash flow – or working capital – that sustains your business and allows you to grow. Effective accounts receivable risk management lowers your exposure by ensuring that invoice balances are paid on or before the invoice due date. While sales drives revenue, accounts receivable management mitigates the potential of receiving payments past due or not getting paid at all.
What Are the Risks of Accounts Receivable?
It is a normal course of business to extend trade credit and then have to manage accounts receivable. But accounts receivable management comes with inherent risks that can affect the quality of insight you have into your receivables and affect cash flow. 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.
- Accounts receivable 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.
How to Quantify Accounts Receivable Risk
If a few clients represent the majority of your accounts receivable, you have an imbalanced receivable risk. This is called a high accounts receivable concentration and is a standard way to measure the riskiness of your accounts receivable.
With a single large customer or a few large customers representing a majority of your accounts receivable, you face a cash flow risk if those receivables become uncollectible. Learn more about the risks involved with a high customer concentration.