- What is a business claim?
- How receivables appear on your balance sheet
You may have noticed this with administrative procedures: it's best not to forget them, because they're not likely to disappear on their own! The same goes for receivables: by being well informed on the subject, you can set up adequate monitoring and prevent them from turning into unpaid bills. Here's a complete guide to receivables!
Key Takeaways
- A business claim (receivable) is money owed to your company for goods or services delivered but not yet paid for by the customer.
- Once the payment deadline passes without collection, a receivable becomes a late payment or unpaid invoice requiring follow-up action.
- Clear quotes and general conditions of sale establishing payment terms are your first line of defense against non-payment.
What is a business claim?
A business claim is an amount owed to a company as payment for a service provided or goods delivered to a customer. It is an amount that the company is legally entitled to demand. If you use invoicing software, you can easily view and track your company's receivables, i.e., amounts awaiting payment.
As long as the payment deadline you set and communicated to your customer (one month, three months or 30 days end of month most often) has not been exceeded, the money owed to you is a receivable. If this amount has still not been paid after the payment deadline, the receivable becomes a late payment or an unpaid invoice.
The quotes and general conditions of sale make it possible to establish a precise framework regarding:
- the due date of a debt;
- protection of the company against non-payment;
- the recovery procedure.
For small businesses, receivables typically represent one of the largest items on the balance sheet. A freelance designer who invoices $5,000 on Net 30 terms, for instance, carries that $5,000 as a receivable for up to 30 days. If several clients owe money at once, the total can dwarf the cash sitting in the bank account, which is why tracking claims matters so much.
How receivables appear on your balance sheet
Business claims are recorded as current assets on your balance sheet under "accounts receivable," following the recognition principles outlined by the Financial Accounting Standards Board (FASB). When you issue an invoice, the receivable is created. When the customer pays, the receivable converts to cash. This cycle directly affects your working capital and your ability to cover expenses like rent, payroll, and supplier costs.
A simple formula shows the impact:
Working Capital = Current Assets (including receivables) - Current Liabilities
If $20,000 of your $30,000 in current assets is tied up in unpaid receivables, your actual available cash may only be $10,000. That gap is where many small businesses run into trouble paying their own bills on time.
Aging categories for receivables
Most accounting systems break receivables into aging buckets to help you spot problems early:
| Aging Category | Status | Risk Level |
|---|---|---|
| 0-30 days | Current | Low |
| 31-60 days | Slightly overdue | Moderate |
| 61-90 days | Significantly overdue | High |
| 90+ days | Severely overdue | Very high, consider write-off |
As a general rule, the probability of collecting a receivable drops sharply after 90 days. Industry data suggests that invoices older than 90 days have only about a 70% chance of being collected, compared to over 95% for invoices under 30 days.
Some examples of receivables
Let's imagine that you are a micro-business photographer and that you are carrying out a session on behalf of a client (a legal entity or individual).
Once the photos are sent and the invoice is issued, you will have a claim on this customer.
Another example of a sale of goods: if you deliver pastries that you make to a canteen every week, this establishment has a receivable from you at the end of the month. In the same way, your supplier of chocolate, flour, and yeast has a receivable from your company after having procured these products for you!
A third example involves a consulting firm. If you complete a strategy project for a client in January and issue a $12,000 invoice with Net 60 terms, that amount sits as a receivable on your books until March. During those 60 days, you still need to pay your team, your office lease, and your software subscriptions, all from existing cash reserves.
What are the conditions for recovering a debt?
To proceed with recovery in the event of non-payment, three conditions must be met:
- the claim must be certain, that is to say it is possible for the creditor to prove its existence, for example using an accounting document stored in your invoicing software;
- the debt must be liquid (it must be a specific amount);
- the debt must be due (the settlement date must have passed).
Steps in the recovery process
If those three conditions are met, you can follow a structured recovery process:
- Friendly reminder - Send a polite email or message within a few days of the missed due date. Many late payments are simply oversights.
- Formal payment reminder - If the first reminder goes unanswered after 7-10 days, send a formal written reminder referencing the invoice number, amount, and original due date.
- Final notice with late fees - Apply any late payment penalties outlined in your terms and conditions. Include a firm deadline, typically 7-14 days.
- Demand letter - A formal letter, sometimes sent by a lawyer, that puts the debtor on official notice.
- Legal action or debt collection - If all else fails, you can engage a collection agency or pursue the matter in court.
Starting with friendly reminders resolves the vast majority of overdue receivables. Automated reminders through invoicing software like Billed can handle this step without any manual effort.
Difference between a business claim and a debt
Accounts receivable is the money a business is owed by a customer. This amount is exchanged for a service or sale.
The debt, on the other hand, is an amount that the client must pay to the company that provided the service.
So it's all a matter of perspective. The creditor wants payment from the debtor, which is the claim. The debtor must make a payment to the creditor. This is the debt.
| Business Claim (Receivable) | Debt (Payable) | |
|---|---|---|
| Perspective | You are owed money | You owe money |
| Balance sheet | Current asset | Current liability |
| Example | Client owes you $3,000 for consulting | You owe your supplier $1,500 for materials |
| Goal | Collect as quickly as possible | Pay on time to maintain good terms |
Common mistakes when managing business claims
Even experienced business owners make errors that lead to cash flow problems:
- Not setting clear payment terms upfront. If your invoice simply says "due upon receipt" without specifying what that means, clients may interpret it loosely. Always include a concrete number of days (Net 15, Net 30) in your quotes and contracts.
- Failing to follow up promptly. Waiting months to chase an overdue invoice dramatically reduces your chances of collection. Set up automated reminders so nothing slips through the cracks.
- Not documenting the agreement. Verbal agreements are difficult to enforce. Always have a written quote, contract, or purchase order that the client has signed or accepted before starting work.
- Ignoring aging reports. If you never review which invoices are 30, 60, or 90+ days overdue, small problems compound into serious cash shortfalls.
- Offering overly generous payment terms. Net 60 or Net 90 terms may win clients, but they also mean you are financing their operations interest-free. Match your payment terms to your own cash flow needs.
Need a simpler way to manage your business finances? Try Billed free to handle invoicing and expense tracking in one place.
Frequently Asked Questions
What is a claim?
A receivable is an amount that is owed in exchange for the provision of a service or a sale. It represents a legal right to collect payment and appears as a current asset on your balance sheet until the customer pays.
How to avoid late payments?
You can prevent late payments by detailing the terms and conditions (payment deadline, late payment penalties, etc.) as much as possible in your quote or general terms and conditions. Offering early payment discounts, such as 2% off if paid within 10 days, can also encourage faster payment. Billed can also help you manage unpaid bills by automatically following up with your customers.
Is it mandatory to provide quotes?
Self-employed workers are not legally required to provide a quote. However, writing a quote helps establish a clear framework for settling debts. This can be useful if you need to initiate debt collection proceedings.
What is the difference between a receivable and revenue?
Revenue is the total income your business earns from sales during a period, recorded when the sale is made. A receivable is the portion of that revenue that has not yet been collected in cash. You can have high revenue but poor cash flow if most of it sits in unpaid receivables.
Related resources: Learn about invoice payment terms and explore Billed's invoicing software for professional billing.