What are Net Receivables?
How Do Net Receivables Work?
Net Receivables = (Total Amount Borrowed By Customers) - (Amount Borrowed By Customers That Will Never be Repaid)
Companies often sell goods and services on credit, allowing a customer to repay on a later date. When the payment date becomes due, some purchasers find themselves unable to pay.
According to generally accepted accounting principles (GAAP), the company selling the item should estimate the percentage of customers who will be unable to pay. The company accordingly takes a charge against receivables, essentially writing off the uncollected funds as bad debt expense or uncollectible accounts expense. What is left after deducting for bad debt is known as net receivables.
For example, let's say Company XYZ sells $100,000 worth of merchandise to its customers on credit in May. After analyzing its accounts, Company XYZ determines that 2% of that amount will be uncollectible (for various reasons-perhaps some customers filed bankruptcy). The company would then make an entry on its books for an uncollectible expense of $2,000. Therefore, the company’s net receivables for May will be $98,000 ($100,000 - $2,000 = $98,000).
Why Do Net Receivables Matter?
The net receivables amount shows how much money the company can expect to collect from its borrowers.
Investors compare net receivables to accounts receivable to find the net receivable percentage. This percentage is important as it shows how effectively the company can collect from its borrowers. The closer a company's net receivables percentage is to 100%, the more effective they are at collecting from customers, and the more financially stable the company is.