Net Receivables (also called Accounts Receivable, Net) are the outstanding amounts owed to a company by its customers for goods or services delivered on credit, minus an allowance for doubtful accounts (bad debts). This figure shows the realistic value of receivables expected to be collected.
Why are Net Receivables Important?
Net Receivables are important because they:
Reflect Collectability: Show the portion of sales on credit that the company realistically expects to convert into cash.
Impact Cash Flow: High receivables can tie up cash, affecting liquidity; monitoring net receivables helps manage working capital.
Assess Credit Risk: The allowance for doubtful accounts highlights the risk of customer non-payment and the effectiveness of credit policies.
How are Net Receivables Calculated?
Net Receivables are calculated as:
Net Receivables = Gross Accounts Receivable − Allowance for Doubtful Accounts
Where:
Gross Accounts Receivable: Total amount billed to customers on credit.
Allowance for Doubtful Accounts: Estimated portion of receivables unlikely to be collected, based on historical experience and customer creditworthiness.
Additional Considerations
Receivables Turnover: Ratio of net credit sales to average net receivables indicates how quickly receivables are collected.
Days Sales Outstanding (DSO): Measures the average number of days to collect receivables, helping assess collection efficiency.
Aging Analysis: Categorizes receivables by age to identify overdue accounts and adjust allowances accordingly.