Quote:
Originally Posted by kane
For many manufacturing companies it works like this:
1. Company sales team bids on and is awarded a job by another company.
2. Money is then spent by Company to buy what they need in order to do the job they were just awarded.
3. The job is worked on.
4. The job eventually gets finished and the order is filled, or if it is an ongoing job the first batch of products due are shipped to the customer.
5. Company then gets paid.
During this process the company often has to cover all the costs of production including payroll, equipment/tool purchases and any outside contractors they may have to hire. When they get paid for delivering the product they recoup their costs, but if the company doesn't have a decent cash reserve they may have to rely on short term credit to cover their costs while they do the work.
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Accounts Receivable (Money owed by customers (individuals or corporations) to another entity in exchange for goods or services that have been delivered or used, but not yet paid for) may say they have $1 million bucks, but often times (if not 99% of the time) companies pay 30 days, 60 days, 90 days after delivery of the product.
Receivables usually come in the form of
operating lines of credit and are usually due within a relatively short time period, ranging from a
few days to a year.
On a public company's balance sheet, accounts receivable is often recorded as an asset because this represents a legal obligation for the customer to remit cash for its short-term debts
--> If the person that owes them money defaults, you can see how the snowball gets going!