Managing Accounts Receivable
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Kyle Ashcraft, CPA · 2019 CPA Exam Scores · 95 FAR · 98 BEC · 91 REG · 90 AUD
Managing accounts receivable comes down to one question: are you collecting your money quickly enough? Three levers control that — discounts, credit standards, and what to do if you need cash before customers pay.
Why offer an early-payment discount?
A discount incentivizes customers to pay sooner. If customers normally take 30 days to pay, offering a 2% discount for paying within 10 days means they'd owe $98 instead of $100 — and you get the cash three weeks earlier.
The size of the discount matters. Set it too low and customers won't bother paying early. Set it too high and the extra cost of the discount outweighs the benefit of getting cash sooner.
Why do credit standards matter?
Not every customer should get to buy on credit. A customer with poor credit may never pay, forcing you to write off the balance as bad debt expense. Setting credit standards is how you screen for that risk before extending credit in the first place.
What if you need cash before customers pay?
Sometimes a company can't wait for its accounts receivable to come in. There are two very different ways to get cash from an AR balance early — and they're not interchangeable.
Pledging or assigning receivables
Pledging (or the more formal version, assigning) means using your AR balance as collateral for a loan. The receivables stay on your books as an asset, and you record a loan liability for the cash you borrowed. You (or, under some arrangements, the lender on your behalf) still collect from your own customers. If you don't repay the loan, the lender has the right to those AR proceeds.
Study tip: Pledging/assigning = borrowing against AR. The receivable stays on your balance sheet, and a liability shows up alongside it.
Factoring receivables
Factoring is different: it's an outright sale of your AR balance to a factor (often a bank), not a loan. Say your company has a $100,000 AR balance and needs cash now. You factor it to a bank, which pays you $80,000 today for the rights to collect it. The bank now owns the receivable — when your customers eventually pay, the full $100,000 goes directly to the bank, not you.
The benefit is immediate cash. The cost is the discount you take (here, $20,000) as the factor's fee. Because this is a sale, the receivable comes off your books entirely, and no loan liability is recorded.
Study tip: Factoring = selling AR outright. The receivable comes off your balance sheet, and there's no loan liability — just the discount you gave up to get cash today.
The real distinction is borrowing vs. selling. Pledging and assigning keep the receivable on your books and add a liability; factoring removes the receivable from your books entirely and adds no liability. Same goal — cash now instead of later — but very different accounting.
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Kyle Ashcraft, CPA scored 90 or above on every section of the CPA exam in 2019, including a 98 on BEC. He is the founder and sole instructor of Maxwell CPA Review, a complete CPA review course covering all six sections, where he creates every lecture, textbook and study outline himself.