What are 'Receivables'
Receivables is an asset designation applicable to all debts, unsettled transactions or other monetary obligations owed to a company by its debtors or customers. Receivables are recorded by a company's accountants and reported on the balance sheet, and they include all debts owed to the company, even if the debts are not currently due. Long-term receivables, which do not come due for a significant length of time, are recorded as long-term assets on the balance sheet; most short-term receivables are considered part of a company's current assets.
BREAKING DOWN 'Receivables'
Receivables, also referred to as accounts receivables, are created for customers through the use of credit. Some customers are given 15 days to pay while others are given a year or more. As the account ages, the likelihood of converting the receivable into cash decreases. Once a company believes a receivable is not going to be paid, it can transfer the account to a contra account called the allowance for doubtful accounts. The allowance is based on the number of receivables that did not pay from the previous period.
If a company sells widgets and sells 30% of them on credit, it means 30% of the company's receipts are receivables. That is, the cash has not been received but is still recorded on the books as revenue. Instead of an increase in cash, the company makes an increase to accounts receivable. They are both considered an asset, but accounts receivable is not considered cash until it gets paid off. If the customer pays the bill in six months, on the seventh month the receivable is turned into cash and the same amount of cash received is deducted from receivables.
Uses and Manipulation
There are many ways companies can use receivables. Some companies, in an effort to reduce the amount of accounts that do not pay, may sell receivables at a discount in a process called factoring. Accounts receivable may also serve as a collateral on a loan.
From an accounting perspective, receivables represent a placeholder for cash. When companies want to increase revenue growth, they can extend credit terms or loosen eligibility requirements on credit. The company likely increases sales, but some of those sales may never turn into cash. This is one reason analysts like to use cash flow ratios as opposed to earnings ratios. However, cash flows can also be exploited. If a company wants to increase cash flow, it can reduce credit terms or take longer to pay its own receivables, also referred to as payables. When companies manipulate these line items to increase cash, it is referred to as extending the cash flow cycle.