Good Funds | B2B Finance Glossary
What Are Good Funds?
Good funds – also known as available funds – refer to those in a company’s treasury and are guaranteed to be available on demand. The best way to think of good funds is to think of them like cash: they are a tool for exchange that are valid, available, and usable – in other words, good funds represent the total amount of capital that can be withdrawn at an ATM or used to write a check, make purchases with a debit card, pay bills, and make transfers.
Additionally, good funds differ from checks in that they do not need to be cleared by the check writer’s bank before the funds are transferred. It’s important to note that good funds might differ from the company’s current balance because this generally includes pending payments.
What is the Difference Between Good Funds and Account Balance?
Not all transactions are processed instantly; for example, incoming wire transfers sometimes take two days to deposit. Sometimes, other transactions, like ACH payments, can take three to five days to process, and checks can take even longer. On top of that, some banks may make only part of the check available immediately or within one business day; the rest of the remaining balance of the check might come in after two days. Banks do this to ensure the check payments are legitimate and will not bounce.
As a result, an account holder’s account balance – which includes pending transactions – might be larger or smaller than the available funds (the good funds). That’s because good funds only include the funds the account holder has at their disposal right then and there.
What is the Difference Between Good Funds and Accounts Receivable (AR)?
Accounts receivable (AR) is the balance of funds due to a business for products or services delivered to customers but not yet paid for.
For example, suppose a business is building a new office and needs to purchase carpeting from a supplier. In that case, the supplier will start working on the order and send the business an invoice for the carpeting. That invoice represents the AR – the outstanding revenue due to the carpeting supplier. While the finance team of the carpeting supplier company can keep track of the overdue payments that are due to them, the AR is not considered good funds until the payment is sent in and is fully cleared. The same would be true for a company that offers accounting services to other companies. The accounting company might help a business file its taxes; once the taxes are filed, the accounting invoice will send an invoice to its customer company, meaning the customer company’s outstanding payment is now classified under AR. Once the customer company pays the accounting company and the funds are cleared, the funds are considered good funds because they are readily available for the accounting company to use.
Why is it Important to Know the Differences Between Good Funds, Account Balance, and AR?
Companies need to know the difference between good funds, account balance, and AR because it helps them better understand what funds they have available at their disposal in the present moment, what funds are set to come in in the future, and how to plan for upcoming company expenditures.
Good funds show companies the amount of money they have available to them right then and there. This is important when budgeting for immediate payments that are due, such as payroll, facilities bills, and any other essential expenses. Additionally, when a company knows its good funds, it can accurately understand the budget for any new expenses it might want to take on.
On top of this, by knowing its account balance, a company can gain more insight into payments that customers have sent in but still need to be cleared. This can help when planning for any critical expenses that are due or about to be due.
It’s also essential to have a finance team that is properly managing AR because a well-functioning AR department can help collect revenue more quickly, reduce DSO, reduce the number of failed payments, and speed up the collection of late payments. On top of this, understanding the amount of money that is still outstanding can help companies better plan for upcoming expenditures. Knowing which payments are still outstanding can help companies recoup late or failed payments and set up a system to increase DSO.
Therefore, good funds, account balance, and AR are all critical to understanding what funds are available immediately and what will be available in the future. They can help finance teams plan more accurately when it comes to scaling and also help when it comes to making financial projections for the future.