Jaian Cuttari - Accounting's Importance of Analyzing Receivables

1. Jaian Cuttari - Accounting's Importance of Analyzing Receivables Investors usually focus on revenue, net income, and earnings per share when studying financial statements, says Jaian Cuttari. Though analyzing a business's revenues and profits will give you a sense of the overall health of the firm, examining the accounts receivable helps you dig deeper into the details. Accounts Receivable: What is it and why is it significant? As a simple explanation, accounts receivable measure the money a business is likely to receive from its customers in the future. A receivable is accounted for as an asset on the balance sheet since the business expects to receive the money in the future. The majority of companies do not desire to gather 100% of the funds ascertained in accounts receivable. Given this risk of nonpayment, you may wonder why businesses continue to provide goods and services without requiring payment in advance. When dealing with regular and reliable customers, a business may benefit from selling goods and services on credit. It may be able to make more

2. sales that way and reduce transaction costs as well. For example, a business can invoice reliable customers periodically instead of accepting numerous small payments. Analysis of Accounts Receivable Analysts have developed a variety of methods to discover a business's accounts receivable's underlying quality. An investor can try to determine the degree to which a business's sales have not yet been paid for by its customers by using the accounts receivable-to-sales ratio. This ratio is based on the business's accounts receivable divided by its sales. A high ratio indicates that the business may have trouble collecting payments from its customers. In addition to the techniques described above, accounts receivables can be analyzed in many different ways, says Jaian Cuttari. While individual investors will disagree over the most appropriate method, few would dispute that accounts receivables analysis is an imperative part of investment due diligence.