Beyond its effect on cash flow, negative accounts receivable is likely to make a business seem to owe much more money than it actually has, scaring off investors, customers and other interested parties. It can result in a defective financial report. Since companies make decisions on the basis of these financial reports, it can result in poor decision-making.
After some time, these financial challenges become operational challenges, as more time and resources are needed to fix these issues. This kind of use poses a risk of creating significant opportunity costs as resources are used to conduct low-value undertakings to the detriment of more valuable tasks.
Factors that Create Negative Accounts Receivable Balances:
There are a number of reasons that might cause a negative account balance. You need to look at the possibilities that any of the following explanations may apply to your personal financial records.
Data Entry Errors
Data entry errors can occur if someone in accounting forgets to enter a value in the column on the spreadsheet in Excel or forgets to record a payment. For example, someone in the accounting staff will possibly record a payment from the client of $850 as $580, thus creating an outstanding balance that is not present in the account system. Similarly, a worker can also credit a customer with the wrong account, resulting in a negative balance of one account and a customer owing to another account. These mistakes often occur in manual data entry, especially when many invoices or credits are entered. These minor errors, such as wrongly recording the date of payment on the A/R ageing report, can skew the financial report.
How to Fix: You need to introduce a check-in to your monthly closing to kill any possibility of data hitch, or have your accounts receivable run on autopilot. Therefore, killing anything with the help of human beings, virtually.
Your Prepayments Have been accounted for as Receivables
In the case where a customer pays in advance for any goods or services they might receive, a person can hence capture the payment against accounts receivable in the balance sheet. However, failing to apply it to an invoice or to write it off against their gross balances may result in having negative accounts receivable balances in your books. For example, a customer can choose to pay in advance, and this is done before a service is offered. When this is booked as a receivable without any corresponding invoice, it may lead to a discrepancy, or a credit balance would appear on the account of the customer.
How to Fix: The prepayment ought to be initially recognised as an asset against a liability account. Thereafter, they should debit the prepayment amount on receipt of the goods or services provided and the sending of the invoice.
The Debt Was Incorrectly Written Off
Occasionally, it can appear that a client will never settle a late invoice. Once they have passed their payment dates by 30, 60, and 90 days, it is only natural and healthy behaviour of the accounts receivable management process that you have written off these expenses by debiting the amount as a bad debt and crediting the accounts receivable in an equal amount.
But, in the event a long-standing overdue customer pays you after you have reconciled the collection (this is most common when it comes to when a new manager is in place), their collection will wipe out an adverse balance in the accounts receivable.
How to Fix: In order to correct the books once more, you have to reverse the write-off and account for the receipt of the new payment.
Unrecorded Credit Advances
Your company can also choose to allow a customer on credit due to a defective product or an absent one, or to delay in the given service. However, when an accounts receivable professional records the credit without knowing that a customer payment has already been recorded, then this amount can be deducted from the A/R balance.
For example, say that an account reported paying in receivables $2,000 and you gave the account a credit amounting to $500, then your A/R balance would be ($500).
How to Fix: Capitalize a liability on the amount of the extended credit.
Overpayment From Customers
When a customer makes an overpayment of an invoice, the excess is normally regarded as an asset. In case of inability to reconcile this amount to another invoice or account, it may result in the accounts receivable balance going into negative.
For example, a customer makes a payment of $100 on an invoice and accidentally overpays an amount of $50. The A/R department also charges it as an additional amount to the account, bringing a negative balance.
How To Reduce the Likelihood of Negative Accounts Receivable on the Balance Sheet
Automation of accounts receivable is an effective way of minimizing any likelihood of accounting errors, such as negative accounts receivable, because it simplifies the process and reduces the number of manual operations. Especially, automated AR software has the power to enhance
Data precision: Since with automated systems, there is the elimination of manual data input, there are minimal chances of typographical inaccuracies, and this makes the information about customers, invoices, and amounts to be paid to be precise.
Invoice printing and delivery: Automatic software helps to create invoices automatically using a pre-existing template and guarantees consistency and accuracy of the invoice content. This is because it allows the delivery of invoices promptly, and it also lessens the possibility of your customers continually misreading your invoices owing to discrepancies.
Payment matching and reconciliation: Another practical component of AR automation, especially regarding the errors mentioned, is that it allows for matching the incoming payment with an invoice in real time and reduces the errors, i.e. mismatched payment or lost transactions.
Reminders and follow-ups: Automating accounts receivable allows paying reminders to be automatically sent on a specific schedule and resolve shortages, missed payments, late charges, payment time mismatch and avoidable write-offs.
Reporting and analytics: Financial reporting and analytics are another area where automated systems can deliver comprehensive and precise reports that give businesses real-time information on their accounts receivable performance. The reports can be used to detect patterns, trends, and possible problems by which one can make proactive decisions.
Automation of accounts receivable may increase the efficiency level, minimize the chances of human errors, and contribute to the development of a more effective financial management mechanism that is less prone to errors. It is also able to release your AR team to deal with less tedious, manual work, such as management of vendor relationships.
Invoiced: Healthy Accounts Receivable. Invoiced
In the absence of a capacity to obtain a clear pulse on the flow of cash, no informed decisions can be taken, but a manual approach to data processing is not scalable. The risk of human error combined with the immense time (especially when it comes to shuffling payment data around) necessitates the advantages of automating the accounts receivable processes of many different businesses.
The automated accounts receivable software offered by Invoiced has the potential to alleviate, or even eradicate, the issues of potential errors that would turn your accounts receivable into a negative balance, collection expenses, and offer a superior customer experience, as well as allow the time needed to focus on more valuable tasks. If you want to know more about our solutions, book a free demo with the representatives of NCRI right now.
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