An accounts receivable reserve is a type of reserve account created to offset losses incurred when customers fail to remit payments on outstanding invoices.
An accounts receivable reserve is a type of reserve account created to offset losses incurred when customers fail to remit payments on outstanding invoices. The idea of the reserve is to prevent the company from experiencing serious financial difficulties due to non-payment. Such a reserve account can be used to offset the impact of bills that become overdue when a customer goes bankrupt, closes a deal, or simply stops paying, and the balance is turned over to a collection agency.
There are several strategies that can be used to determine the amount of funds to allocate to an accounts receivable reserve. One of the most common approaches is to make use of historical data involving the percentage and actual amounts of delinquent invoices that have occurred within a given time period. A slightly different approach calls for basing the amount on the due date of the bills, with the reserve balance based on the sum total of bills older than 90 days. Choosing the best approach often depends on business circumstances and how easily the business can recover if past bills are not paid in full.
The main benefit of establishing and maintaining an accounts receivable reserve is that the business is somewhat protected from the ill effects of customers failing to pay outstanding invoices. By having reserves available, the company can offset these losses and continue to disburse payments to vendors and suppliers without fail. By having sufficient funds in reserve, it is possible to avoid late fees and other accounts payable penalties that would only increase the company’s debt obligations, making financial stability even more difficult.
Guidelines on when to use funds from an accounts receivable reserve vary. Some companies require delinquent customer accounts to be submitted for collection before reserve funds can be used to offset losses. Other companies adopt the practice of withdrawing funds from the accounts receivable reserve when invoices reach a certain age level, such as 120 days after they are issued. In case the funds will be received due to collection efforts or the client sends a payment if he or she reaches age or age limit, these payments can be used to reserve, allowing the company to maintain this type of money. for the future .