Maturity of receivables: Overview, definition, and example
What is the maturity of receivables?
The maturity of receivables refers to the period after which accounts receivable, or the amounts owed by customers to a business, are due for payment. It is the time frame from the date a sale is made or credit is extended until the payment is expected or required to be made. The maturity period is typically outlined in the payment terms of a contract, such as "30 days," "60 days," or "net 90," and can vary depending on the type of business, industry practices, or the agreement with the customer. The maturity of receivables is a key factor in managing cash flow, as it determines when a business can expect to receive payment for its goods or services.
For example, if a business sells a product on credit with a payment term of "30 days," the maturity of the receivable is 30 days from the date of the sale.
Why is the maturity of receivables important?
The maturity of receivables is important because it directly affects a company’s cash flow and liquidity. The sooner receivables are paid, the more cash a business has on hand to reinvest in operations, pay bills, or cover other expenses. When receivables reach their maturity date and are not paid, they can become overdue, potentially leading to cash flow problems. Understanding the maturity of receivables helps businesses manage their credit risk, optimize collections, and reduce the likelihood of bad debts.
Additionally, the maturity of receivables is a key metric for assessing a company’s financial health. A large amount of overdue receivables may indicate problems with customer creditworthiness, inefficient collections, or poor sales practices.
Understanding maturity of receivables through an example
Imagine a retail business that sells products on credit to a customer with payment terms of "net 30." This means that the customer is expected to pay within 30 days of the sale. On day 31, the receivable reaches its maturity and is considered overdue if the payment has not been received. The company may then follow up with the customer, send reminders, or take legal action to collect the payment.
In another example, a company has extended credit to a corporate client with a payment term of "net 60," meaning the company expects to receive payment within 60 days of the invoice date. The maturity of this receivable is 60 days, and the business should monitor its accounts to ensure payment is received on time or follow up if it is not.
An example of a maturity of receivables clause
Here’s how a clause about the maturity of receivables might appear in a contract:
“The Buyer agrees to pay the Seller the full invoice amount within 30 days from the date of delivery. If payment is not received by the due date, the receivable will be considered overdue, and the Seller reserves the right to charge interest on the overdue amount at a rate of [insert percentage] per month.”
Conclusion
The maturity of receivables is an essential concept in managing a business's cash flow and financial health. It refers to the time frame in which payment for goods or services is due and is a key factor in determining when a business can expect to receive payment. By monitoring the maturity of receivables, businesses can ensure that they manage their credit risks effectively, optimize cash flow, and take appropriate actions to collect overdue payments. Proper management of receivables helps maintain financial stability and supports the long-term success of a business.
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.