How does Accounts Receivable Affect Profitability?

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How does Accounts Receivable Affect Profitability?

November 29, 2016

Tax Question:

How do past due invoices impact my company’s profitability?

Facts:

Although Accounts Receivable (AR) is considered an asset, having a slow turnover of receivables can negatively affect your company’s bottom line.

Discussion:

When money is owed to your company for prior sales, it can impact many parts of your business. Below we have outlined some things to consider when extending credit:

Cash Flow – if your revenue consists of slow-paying AR, then your cash flow will be affected. This can impact such things as your ability to pay your vendors or meet obligations with your credit financers, which can result in your business incurring costly interest charges. Also, you need to consider that taxes (i.e. GST, PST, corporate income tax) may become due on revenue before the AR has been collected.
Productivity – when cash flow is tight, your company may have to consider keeping less inventory on hand and forego hiring the staff you need to meet demands for your product. This may affect delivery times and limit growth. Additionally, the amount of time spent on bookkeeping tasks to constantly monitor bank account balances to be sure you can meet obligations can also impact your business’ productivity.
Generating Sales – investing time and money chasing collections on revenue you made in prior months consumes resources. This leaves you with fewer resources to chase new leads and can impact your company’s growth

If you would like more information on this topic, please contact a member of the Empire CPA team by filling out the contact form below.

Canadian and foreign tax laws are complex and have a tendency to change on a frequent basis. As such, the content published above is believed to be accurate as of the date of this post. Before implementing any tax planning, please seek professional advice from a qualified tax professional. Empire, Chartered Professional Accountants will not accept any liability for any tax ramifications that may result from acting based on the information contained above.