What Are the Risks of Accounts Receivable?

A slow cash flow — or working capital — that sustains your business and allows it to grow is one of the risks associated with accounts receivables. You reduce your exposure to accounts receivable risk when invoice balances are paid on or before the invoice due date through effective accounts receivable risk management.

According to Addison Rockwell Recovery, accounts receivable management mitigates the risk of not getting paid at all or receiving payments past due while sales drive revenue.

Trade credit and account receivable management are normal parts of business operations. You must take care of accounts receivables in a way that protects your cash flow and gives you a better understanding of your receivables. Typical accounts receivable risks include:

Overstatement of revenue

Revenue is overstated when receivables are recorded as more than the amount owed by customers. To make it seem as if profits are higher than they are, potentially uncollectible accounts can be purposefully not excluded from the accounts receivable total when accounts receivable recordkeeping is disorganized or if potentially uncollectible accounts are intentionally not excluded.

Unenforced cutoffs

Without the proper cutoffs, accounts receivables and revenue can be overstated. Cutoffs ensure that financial transactions are accurate and accounted for in the appropriate accounting period.

Understatement of revenue

An understated revenue occurs when fewer receivables are recorded than what customers are owed. This can happen due to an accounting error or purposely to lower taxable income.

Accounts receivable concentration

Your revenue is at risk when only a few customers account for your receivables and those receivables are not paid on time or not paid at all.

How to Quantify Accounts Receivable Risk?

High accounts receivable concentration is a standard way to measure the riskiness of your receivables if you have a few clients who represent most of your receivables.

According to Addison Rockwell Recovery, learn about the risks involved with a high customer concentration if you have a few large customers who represent the majority of your accounts receivable.