Characteristics of receivables: Overview, definition, and example
What are the characteristics of receivables?
Receivables refer to amounts owed to a business or organization by its customers for goods sold or services rendered. The characteristics of receivables describe the key features or attributes that distinguish them, and these characteristics help businesses manage their collections, cash flow, and credit risk. Common characteristics of receivables include the due date (when payment is expected), the terms of payment (such as net 30, net 60), the interest rate (if applicable), and the creditworthiness of the customer. Receivables can be categorized into different types, such as accounts receivable (AR), notes receivable (NR), and other forms of receivables.
For example, if a business sells a product to a customer with a payment due in 30 days, the receivable represents the amount owed by the customer and will have specific terms governing the payment.
Why are the characteristics of receivables important?
The characteristics of receivables are important because they influence how a business manages its cash flow, collection processes, and credit policies. Understanding these characteristics helps businesses assess the risk associated with collecting the amounts owed, determine how long it will take to receive payment, and make informed decisions about extending credit. For example, receivables with longer payment terms may require more proactive collection efforts, while receivables from customers with strong credit histories may carry less risk. Properly managing the characteristics of receivables helps businesses maintain financial stability and minimize the risk of bad debts.
Understanding the characteristics of receivables through an example
Let’s say a company sells products to a customer for $10,000, with payment due in 60 days under the terms of net 60. This receivable will have the following characteristics:
- Amount: $10,000
- Due date: 60 days from the sale
- Payment terms: Net 60, meaning payment is expected in full by the 60-day mark
- Credit risk: Depending on the customer’s creditworthiness, the company may consider this receivable high or low risk.
- Interest: If the company charges interest on overdue receivables, an interest rate may apply if the customer does not pay on time.
In another example, a business might have receivables from a long-standing customer with an excellent credit history. These receivables would likely have favorable characteristics, such as shorter payment terms (e.g., net 30) and minimal risk of non-payment.
An example of a characteristics of receivables clause
Here’s how a characteristics of receivables clause might appear in a credit agreement:
“The Buyer agrees to pay the Seller the total amount of $[insert amount] for the goods purchased under this Agreement. Payment shall be made within [insert number] days from the invoice date (Net [insert terms]). If payment is not received by the due date, the Buyer agrees to pay interest at a rate of [insert interest rate]% per annum on the overdue amount, and the Seller reserves the right to suspend further shipments until the outstanding balance is cleared.”
Conclusion
The characteristics of receivables are essential in managing a business’s financial health and ensuring smooth operations. By understanding the due date, payment terms, credit risk, and other attributes, businesses can more effectively manage their cash flow and reduce the risk of bad debts. Well-managed receivables help businesses maintain profitability and provide insight into their financial standing, while poor management can lead to delays, disputes, and potential financial instability.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.