Receivables vs. Payables: An Easy Primer for Thai Entrepreneurs

Accounts receivable (AR) and accounts payable (AP) are the backbone of a successful business in Thailand. When revenues and expenses are properly balanced, companies can seize growth opportunities and maintain positive relationships with customers and suppliers.

However, many Thai entrepreneurs find the intricacies of managing accounts receivable and accounts payable confusing. Failing to understand the differences would lead to inaccurate financial reporting, cash flow concerns, and instability.

Take care of your financial health by properly managing AR as assets and AP as liabilities. Income and spending must be in equilibrium to grow sustainably. Lenders and investors analyze AP and AR to assess a company’s stability.

Proper accounting practices in Bangkok and Thailand (in general) for recording accounts receivable and accounts payable are the key to accuracy. Optimizing payment terms and cash flow helps businesses thrive.

What are Accounts Receivable (AR)?

Accounts receivable is the money that customers owe your business for goods and/or services that have been invoiced but not yet paid for. It is considered an asset on the balance sheet.

Accounts receivable arise when a company provides services or sells products on credit. The business will record an account receivable when it issues an invoice, even if payment is due at a later date.

Examples of Accounts Receivable

A digital marketing agency in Bangkok performs SEO services for a client for 50,000 THB. They invoice the client upon completion of the project, with net 30 payment terms. The 50,000 THB is immediately entered into the agency’s accounts receivable ledger. It remains there as an asset until the client pays within 30 days.

Similarly, a retailer in Chiang Mai sells high-end silk products to a boutique in Phuket. They issue an invoice for 200,000 THB when the items ship, with payment due in 90 days. The retailer records 200,000 THB as accounts receivable for the next three (3) months until payment is received.

Manufacturers also commonly use accounts receivable. A Thai auto parts supplier ships a large order to an international automaker overseas. They invoice the client for 15 million THB upon shipment, with payment installments due over the next 15 months. The full 15 million THB is entered into accounts receivable initially, then reduced over time.

Service companies can have long-term accounts receivable too. A Thai architecture firm is hired for a major 2-year stadium project. They invoice progress payments monthly as work is completed per their contract. Unpaid invoices accumulate in accounts receivable over the multi-year project duration.

Key takeaway

As a business owner, record accounts receivable properly to accurately represent the assets owed to you by customers. This contributes to reliable financial statements and healthier cash flow management. Monitoring accounts receivable turnover metrics also helps gauge how efficiently a firm collects what it is owed.

What are Accounts Payable (AP)?

Accounts payable refers to money your business owes to suppliers and vendors for services or goods that have been invoiced but not yet paid for. It is considered a current liability on the balance sheet.

Accounts payable arise when a company purchases inventory, materials, supplies, or other items on credit. The business records an account payable when it receives a supplier’s invoice, even if payment is due at a later date.

Examples of Accounts Payable

A restaurant in Phuket stocks up on imported wines from a distributor. They are invoiced 500,000 THB by the distributor upon receipt of the wine shipment, with payment due in 60 days. The restaurant immediately records 500,000 THB in its accounts payable ledger.

Similarly, a Bangkok retailer of consumer electronics orders a large quantity of mobile phones from an international manufacturer. When the shipment arrives, they are invoiced for 3 million THB by the manufacturer, with 90-day terms. The full 3 million THB is entered in accounts payable.

Manufacturers also rely heavily on accounts payable. An automotive parts factory purchases aluminum and steel on credit to fulfill increased production. When invoiced 2 million THB by their materials supplier, they add it to their accounts payable for payment within 45 days.

Even service firms like marketing agencies and law firms have accounts payable. They are invoiced for monthly software subscriptions, office supplies, and contracted services. All unpaid invoices are tracked in accounts payable.

Key takeaway

If you want to control expenses and maintain positive cash flow, you should carefully monitor and manage your accounts payable. Paying suppliers on time strengthens business relationships, and they may provide discounts.

Key Differences between Accounts Receivable and Accounts Payable

Accounts receivable and accounts payable may sound similar, but there are important distinctions between the two. Understand these differences by reading on and analyzing the table below.

Accounts receivable represent future assets and revenue for your business. Accounts payable represent obligations and expenses.

Monitoring accounts receivable turnover, as well as metrics like days payable outstanding, provides insight into how well your business is managing cash flow.

Best Practices for Managing Accounts Receivable and Accounts Payable

Implement the following best practices for managing accounts receivable (AR) and accounts payable (AP) to improve cash flow, increase efficiency, and maintain accurate financials.

Leverage Accounting Software

Automating AR and AP through accounting software like Xero, QuickBooks, and Zoho Books streamlines recording and tracking. Features like invoicing, expense reporting, and payments integrate AR and AP.

Cloud-based accounting solutions facilitate real-time visibility and collaboration across teams. For Thai companies, choosing software that handles multiple currencies and languages is ideal.

Optimize Accounts Receivable

Collecting AR quickly and efficiently boosts cash flow. Set clear payment terms upfront in contracts and invoices. Net-30 or net-60 terms are typical. Shorter terms like net-15 improve collections. However, offering some clients more extended terms can win business.

Invoice clients promptly upon delivering goods or services. Automate invoice reminders at 15, 30, 60, 90 days past due. Payment link integration via Thai e-wallet services like TrueMoney can expedite collections. Evaluate client credit policies to limit late payments. Segment AR by age for better monitoring.

Improve Accounts Payable

Paying AP faster than required can earn early-pay discounts but reduces cash reserves. Seek to negotiate longer payment terms with suppliers to ease cash flow. Create detailed AP budgets and forecasts to control expenses. Set calendar reminders for payments coming due. Use purchase order systems to match invoices to orders placed. And optimize approval workflows for more oversight.

Maintain Segregation of Duties

Strict segregation between AR and AP functions reduces fraud risk. Ensure staff handling AR cannot access AP. Split AP tasks like entering invoices, approving payments, and reconciling statements. Conduct internal audits to verify compliance. Physical access controls and user permissions in accounting software also help enforce separation.

Monitor Metrics

Regularly review key AR metrics like days sales outstanding and AR turnover rate to gauge the efficiency of AR management. High DSO could indicate collection issues. Low turnover signals slower incoming cash flow. Compare metrics over periods to identify trends. AP metrics like days payable outstanding also provide visibility into expenses and liabilities.

Consider Outsourcing

For Thai companies lacking accounting resources, outsourced managed services provide expertise. Specialized AR firms can customize invoicing, collections, reporting, and metrics monitoring. AP service providers update vendor data, process invoices, manage payments, and leverage automation. Cloud accounting platforms enable collaboration. Outsourcing optimizes cash flow and reduces the burden on internal teams.

Managing Accounts Receivable Risks

Accounts receivable carry risks like delayed customer payments, nonpayment, or uncollectible accounts that negatively impact cash flow. Thai companies should mitigate accounts receivable risk through:

• Credit checks on new clients to assess payment history
• Requiring deposits or advance payments, especially for large orders or custom work
• Diversifying the customer base instead of relying on a few major accounts
• Factoring or selling AR to a third party to immediately obtain cash
• Purchasing credit insurance to transfer collection risks for a fee
• Recording allowances for doubtful accounts for estimated uncollectible

If you are careful in monitoring the accounts receivable aging reports, you will be able to identify problems early. Keeping risks low ensures a healthy inflow of payments and prevents write-offs that hurt profitability.

Collection Strategies for Overdue Accounts Receivable

When accounts receivable become overdue, diligent follow-up is required to collect payment. Effective strategies to try include:

• Automated dunning reminders when invoices are 15, 30, 60, or 90 days past due
• Personal emails or calls from sales/accounting to request payment
• Offering small discounts if customers pay within ten days
• Withholding future work or orders until outstanding AR is paid
• Making a personal visit to deliver past due notices and meet directly
• Hiring a collections agency to take over contacting and collecting from delinquent accounts
• Pursuing legal action like liens against assets or wage garnishment as a last resort

The key is to balance firmness with a positive customer relationship. Companies should also watch for signs of financial trouble to avoid uncollectible AR. A streamlined collections process improves cash flow from accounts receivable.

Conclusion

For tailored guidance on managing accounts receivable and accounts payable, consult with accounting experts in Bangkok, Thailand.

Professional service providers like Reliance Consulting offer solutions to manage your company’s accounting needs. The expertise offering will allow you to focus on your core business while optimizing these critical business functions.