Net receivables definition
/What are Net Receivables?
Net receivables is the amount of money owed by customers that a business expects them to actually pay. This information is used to measure the credit and collection effectiveness of an organization, and can also be included in the cash forecast to measure projected cash inflows. A large difference between gross receivables and net receivables indicates a significant problem with either the credit granting or collection activities of a business. The net receivables figure is not entirely accurate, since it includes an estimate of possible bad debts - which may turn out to be different from the estimate.
How to Calculate Net Receivables
The net receivables amount is calculated by subtracting the allowance for doubtful accounts from the gross amount of accounts receivable outstanding. The calculation is:
Gross trade receivables - Allowance for doubtful accounts = Net receivables
The calculation can also be expressed as a percentage of gross trade receivables. For example, a business might report 97% net receivables, meaning that it expects to collect 97% of its gross trade receivables.
The net receivables outcome can be altered if the accounting staff does not set the allowance for doubtful accounts to be a reasonable representation of actual bad debt losses.
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Example of Net Receivables
Net receivables can also be expressed as a percentage, where the net receivable figure is divided by gross receivables to arrive at the percentage. For example, an organization has $1,000,000 of gross receivables outstanding and an allowance for doubtful accounts of $30,000. Its net receivables figure and percentage are calculated as follows:
$1,000,000 Gross trade receivables - $30,000 Allowance = $970,000 Net receivables
$970,000 Net receivables / $1,000,000 Gross trade receivables = 97% Net receivables
How to Improve Net Receivables
The net receivables figure can be improved by maintaining tight control over the credit granted to new customers, as well as by operating an active collections group. Another option is to offer customers an early payment discount, though the customers most likely to renege on their payments generally have little excess cash, and so would be less likely to take advantage of this offer.
Despite these enhancements, the net receivables figure may worsen despite a company's best efforts if there is a decline in general economic conditions that adversely impacts the ability of its customers to pay.
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