An accounts receivable balance is the amount of money due to your company for goods or services rendered but not yet paid for. With that in mind, you may ask how it's possible to check your balance and find a negative number.
It can indicate that your organisation owes customers money and may even suggest financial difficulties but can just as easily be the result of a correctible error. Either way, it's important to identify and rectify the issue promptly to avoid cash flow issues, inaccurate financial statements, operational inefficiencies, and even audit complications.
To correct the problem, it's helpful to know the most common causes of a negative AR balance.
Why do I have a negative balance in accounts receivable?
Data entry errors
If you are still relying on manual data entry in AR, then you are going to have errors. In fact, they're probably more common than you suspect. Here are just a few of the mistakes that can lead to discrepancies on your balance sheet:
- Transposed numbers when entering information
- Transaction entered for the wrong customer
- Credit was extended to the incorrect account
Even the tiniest of mistakes, such as the wrong key getting punched while entering an invoice amount, can cause significant havoc.
Quick Fix: Create a standard operating procedure that includes double-checking all data at the time of input. Managers should also institute periodic data quality checks to ensure accuracy.
Pre-payments recorded incorrectly
If a customer chooses to pre-pay, the amount is not considered part of your accounts receivable balance. It should be recorded as a liability, as the goods or services have not been delivered. However, the transaction can be incorrectly recorded as a normal payment, which would create a negative balance.
Quick Fix: Record the pre-payment as a credit to a liability account, and then debit the amount after the goods and/or services have been provided and invoiced.
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Customer overpayment
A negative AR balance can occasionally be caused by a customer overpaying your company. When this occurs, your organisation must credit the money back. As a simple example, you may have invoiced a customer for £500, but they sent in a payment of £550. If there is no way to reconcile this overpayment with another invoice, it would show up as a -£50 balance in your accounts receivable.
Quick Fix: Inform the customer of the situation and then create an accrued liability.
Premature write-offs
When a customer repeatedly fails to pay an invoice the accounts receivable department may make the difficult decision to write the amount off as bad debt. However, if they later decide to resolve the issue and submit payment, it will create a negative AR balance, as the amount has already been removed from your accounts receivable ledger. Depending on the size of the invoice, this could even result in a very large negative balance.
Quick Fix: Reverse the write-off and document the new payment.
Credit extensions
Account managers will occasionally offer a credit to customers without informing the accounts receivable team. As an example, if a customer receives damaged goods or a delivery with items missing, a representative may decide to provide a credit that can be used on their next order. If this information is not properly relayed to the AR team, it can create a discrepancy in your records.
Quick Fix: Record a liability equal to the amount of the credit.
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How do I prevent a negative accounts receivable balance?
While the quick fixes listed in each section will help you resolve the immediate problem should you encounter a negative balance, there are longer-term solutions that can ensure that the issues do not become endemic.
Reconcile payments immediately
When your company receives a customer payment, it should immediately be reconciled, and discrepancies should be noted. In instances of overpayment, team members should first attempt to reconcile the difference with another invoice or refund the customer the amount.
Regularly review accounts and transactions
Members of the AR team should regularly check their accounts and account transactions to look for any potential issues such as misallocations. Periodic reviews will enable your team to quickly spot mistakes and correct them before they begin to have a downstream impact.
Increase interdepartmental collaboration
Issues such as improperly documented credit extensions are often the result of poor communication between account managers and the AR department. Eliminating the issue means fostering greater collaboration between the teams. You can achieve this by increasing transparency when it comes to account records and increasing regular interdepartmental communication.
Eliminating manual work and embracing automation
The simplest way to achieve each of the above goals is to eliminate manual processes in accounts receivable and introduce AR automation.
By adopting an automation solution that integrates with your other back-office software — such as ERP and CRM — you eliminate the need for manual data entry, reducing the risk of invoice errors. Automation tools provide detailed reporting that allows you to quickly identify discrepancies and regularly monitor accounts. They also allow the AR team to easily share account information with other departments, such as sales, increasing process transparency.
An AR solution with a self-service payment portal decreases the likelihood of errors such as overpayment. Customers can log in to their accounts and immediately access information such as open invoices and amounts owed. They can also ask questions about balances before making a payment.
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