Accounts receivable arise when two parties to the same contract cannot meet their obligations simultaneously. For example, one company ships the goods first, and the other only pays later. Because of this gap, receivables arise: one counterparty has receivables, and the other has payables (Reid and Myddelton 124). For Southwest, such receivables mean a rather unpleasant outcome. This can be seen in the table below and comparisons with other companies. When bad receivables appear, the company loses profits and is left without working capital. If such debts become numerous, the company cannot buy raw materials, manufacture products, and pay wages and taxes, leading to losses and bankruptcy.
Compared to other companies in the case study, Southwest is already making significant losses. In addition, its debt levels are also rising, which is natural when a company is trying to avoid bankruptcy. In the long run, this state of affairs may harm the company’s reputation and rating. In the commodity buying and selling industry, which is very dynamic, it is easy to lose a niche market position. A company that is on the verge of bankruptcy because of receivables cannot retain a leading position. As the research shows, more successful competitor companies can take over some of the demand by providing a better offer. This will be the case because the bankrupt company will not try to make products more affordable.
It is, therefore, the managers’ job to recover debts and, ideally, to prevent such situations. This work is called receivables management. For the partners to pay on time, the company’s staff checks debtors even before concluding a deal and draws up contracts so that it is not profitable for the client to become a debtor. For example, they prescribe penalties for late payment. In addition, the company has to control the volume of overdue accounts receivable and submit claims to dishonest clients. Receivables management also involves collecting debts from non-payers through the courts.
Reid, Walter, and David Myddelton. The Meaning of Company Accounts (8th Ed.). Routledge, 2017. Web.