Receivables and Payables
Both terms, receivables and payables, are generally related to accounting and financial analysis. Still, they are also common when it comes to administrating a business, especially managing cash flow. They are used in planning and forecasting as a measure of future cash movements.
Let’s get familiar with each of them:
Receivables refer to the amount of money owed to the company by customers or other debtors. They are other based on issued invoices, loans or other forms of financial obligations. In cash flow forecasting, receivables count for the expected inflows before a given date. The prediction is usually made based on invoices due within several months. It is good to know that the longer the time until the payment due date, the fewer chances are to receive that money in time (sometimes at all). This is why you need to always check the receivable amount periodically and send reminders when necessary, making sure they turn into actual inflow.
Payables are the opposite of receivables. This indicator reflects the amount of debt your company has to suppliers, lenders, creditors, employees or government.
When managing cash flow, you need to make sure that receivables are greater, or at least equal to payables. In other words, make sure that what you expect to cash in can cover what you need to pay as debt.
However, if the value of receivables increases in time, it is a sign that your cash flow is slowing down; meaning that you are not cashing in as quickly as you should and you risk reaching the Zero Cash Date sooner than you’d expected. This should motivate you to cash in faster (re-negotiate payment dates, make efforts to collect debts, motivate customers to pay sooner). Increasing payables is an indicator of increasing company debt; although for the time being you keep the cash “in your pocket”, the more the debt accumulates, the harder will be to pay it and the greater the impact on the cash flow – a serious outflow in a short period of time may be a shock for your cash reserves.
This being said you need to keep the balance between what is owed to you and what you owe in your turn. Although it may feel encouraging to forecast an important amount of receivables, make sure they enrich the inflow as soon as possible.