A company's receivables: what they are and how to interpret them

How many times have you had to get back up to reach the goal you set for yourself? Sometimes it's hard to stay afloat, but with enough determination, you'll make it.

The business world comes with plenty of challenges. Do you sometimes face unpleasant situations, complicated terms, or too many documents to sign? It's a long, difficult road, and you need to navigate it carefully.

What factors can affect your company's growth?

The main goal of any entrepreneur starting out is growing revenue. Still, it shouldn't become your motto. Money is a way to meet certain needs, but it shouldn't become an end in itself. What matters isn't what you acquire, but your attitude and how you earn it. The most important thing is to keep balance in every area.

Also, the people you choose to work with will strongly influence your company's growth and the direction you take. A lack of seriousness is at the root of failure and shattered dreams.

In business, any mistake can be fatal, especially if it isn't fixed in time. The responsibilities that come with your day-to-day work are many, and you need to respect them to the letter.

What happens, though, if you don't honor the contracts you've signed or the deadlines that were set? You've almost certainly faced at least one situation where:

• either you couldn't pay your debts on time;
• or you didn't collect the receivables due under the contract on time.

The longer receivables go unpaid, the more penalties follow automatically. However, to truly understand how serious the situation is, you need to know the key facts about receivables.

What defines receivables?

In the simplest terms, a receivable is a specific amount of money that a company must collect. Receivables arise from the financial obligations stipulated in signed contracts or loans taken out.

If they aren't collected on time, receivables can push the creditor company deeper into debt. In the worst cases, debtor companies may even be unable to make payments by the due date or may become insolvent.

Receivables are recorded based on issued invoices or other documents established by each company.

The company's debtors, more precisely the parties required to pay those receivables, can be both individuals and legal entities.

Receivables are an important source of income and are therefore part of a company's assets. They stop being simple book values once the amount is transferred into the creditor company's bank account.

What types of receivables are there, and how are they defined?

Receivables are classified according to 3 main criteria:

1. economic content;
2. payment term;
3. degree of association.

Still, the most common types of receivables are:

1. Civil receivables : amounts collected under contracts signed between individuals.
2. Commercial receivables : they arise from a commercial contract signed either between two commercial companies or between a merchant and another contracting party. The contract stipulates the obligation to pay a sum of money after services are provided or goods are delivered.
3. Bank receivables: they arise when a company wants to borrow money from a bank. In that case, a bank loan contract is signed, under which the creditor requires the debtor to repay the borrowed amount and the related interest. Any penalties accumulated by the debtor company are also part of the payment obligation.
4. Tax receivables: they are further classified into two categories:

• primary tax receivables : require the company to pay taxes, duties, and fines to the state budget.
• ancillary tax receivables : arise when the primary ones aren't paid by the due date. As a result, the debtor company is penalized.

1. Salary receivables : in the early stages, some companies avoid hiring staff precisely because the income they collect is low. Over time, the amounts collected begin to grow, and the company decides to build its own team. As a result of employment contracts governed by labor law, the company becomes its employees' debtor. It is therefore obligated to pay them monthly for the services they provide.

What are the conditions for receivables to exist?

Every type of receivable must meet 3 main conditions to exist: it must be certain, liquid, and due.

A certain receivable results from a document that confirms its existence. That document can be the receivable document itself or other documents acknowledged by the debtor. Examples of such documents include any document recognized by the party who will pay the receivables:

• contract;
• invoices;
• payment undertakings.

This means the debtor cannot deny the existence of the receivables or the payment obligation they accepted by signing.

A receivable can be liquid when its amount can be quantified. This means the creditor knows exactly what amount will be collected from the debtor. Documents that prove a receivable is liquid are:

• the receivable document;
• proof of payment;
• balance statements, etc.

A receivable becomes due on the date set for payment of the amount owed. The creditor sets that date, and the debtor is required to respect it. If it isn't honored, penalties or sanctions apply, depending on how serious the situation is.

Still, there are cases where a court extends the payment term at the debtor's request.

What does non-payment of receivables mean?

There are specific situations for each type of receivable, but the most serious scenarios involve bank receivables and tax receivables. The reason is that the authorities involved have enormous power, and the debtor depends on every decision they make.

In the case of bank receivables, penalties vary from case to case. Usually, failing to make the payments due on a bank loan leads to 1% penalties on the total amount for every day that passes. If the debtor repeatedly avoids payment altogether, the Credit Bureau will be notified. The Bureau's main purpose is to monitor and analyze the debtor's behavior and activity. Once the bank notifies the Credit Bureau, a personalized file is created for the debtor. All the negative information recorded in that report will leave the debtor unable to access another loan.

The National Agency for Fiscal Administration (ANAF) is the institution responsible for collecting tax receivables from every company. At the first stage, a tax assessment is established to regulate and identify each debtor's obligations. Tax assessments can include:

• setting the amount;
• declaring the payment obligation;
• the obligation to pay imposed penalties.

Once the debtor fails to meet their payment obligations, the tax assessment is turned into an enforceable title. The enforcement procedure is then communicated to that debtor. If the amount is not paid within 15 days, the debtor is notified that the enforcement process will go ahead. From the moment the process begins, the bank will suspend the debtor's banking activity until the amount is recovered. If the amount still cannot be recovered, the authorities move on to recovering the value of the debtor's assets and income. The targeted assets include:

• movable and immovable assets used in the debtor's business activity;
• cars;
• equipment;
• finished goods, etc.

Recommendations

Receivables fall into several categories, and each comes with specific characteristics. Still, no matter the type of receivable, ask yourself this question: Is it really worth deceiving someone?

You've probably been in a situation where someone didn't pay the amount they owed you. Maybe you instantly changed your opinion of that person or company and promised yourself you'd cut all ties with them. That's exactly why it's important to choose every partner or future collaborator carefully. Receivables that aren't paid on time tell you a lot. Just think about how many problems this kind of collaboration can cause.

Every company starting out faces plenty of setbacks. Still, fairness and maintaining a transparent business environment can solve any problem. Staying afloat is often hard. Challenges appear at every turn, but it's very important to know how to manage them. Nothing is impossible if you truly want it.

Also, try to avoid taking on debt for no reason whenever you can. Analyze your situation carefully and draw the right conclusions:

1. Do you really need that loan?
2. Do you truly have the means to repay it?

The relevant authorities will penalize you accordingly, and you'll deal with the consequences long after the unpleasant event.

Also, don't hire people if you don't need them or if you have no way to pay them. A company's bad reputation is often best defined by dissatisfied employees. You'll end up in the shadows, and when you truly need people, you won't find anyone.

Conclusions

The overall image you build for yourself will be partly responsible for whether you reach the goals you set from the very beginning. It's essential to know your limits and not hope for impossible things. Also, be empathetic and build sincere relationships no matter what position you're in.