ACCOUNTS RECEIVABLE

MANAGEMENT
AN OVERVIEW
 WHAT IS ACCOUNTS
RECEIVABLE?

✔ It represents the amount due from customers (book debts) or debtors as a

result of selling goods or services on credit.

✔ Near-cash item to improve the liquidity of an enterprise

✔ Receivables occupy the second place, in order of investment, among the various
working capital in manufacturing concern.

✔ Accounts Receivable constitutes the second most important current asset next to
inventory.

✔ It aides as a marketing tool to boost the sale of goods, thereby promoting higher
profits.
Sources of Receivables
• The receivable arise out of delivery of goods and services on credit and include:
✔ Book debts or accounts
✔ Notes and Bills
✔ Accrued Receivables

• However, in broader sense, receivable is used to

include further:
✔ Any prepayment made against purchases and
expenses contract
✔ Advances to employees and officers
 Characteristics of Receivables

Risk

Economic Value
 RECEIVABLES MANAGEMENT

❖ Deals with the formulation of credit policy, in terms

of liberal or restrictive, concerning credit standard
and credit period, the discount offered for early
payment and the collection policy and procedures
undertaken to determine an optimal level of
investment in receivables.
• Optimal Level
• Means that the return on investment is maximum to the firm.

• Investment in Receivables
• Depends upon how much the company sells on credit and how long it takes
to collect receivables.
Factors involved in Receivable Management

• The terms of credit granted to customers deemed

creditworthy.
• The policies and practices of the firm in determining which
customers are to be granted credit.
• The paying practices of credit customers.

• The vigor of the sellers, collection policies and practices.

• The volume of credit sales.

 GOALS OF RECEIVABLE MANAGEMENT
✔ The purpose of credit management is to maximize the value of the firm by
achieving a trade off between the liquidity and profitability aspects of the firm.
✔ The firm should manage its credit in such a way that sales are
expanded to an extent to which risk remains within an acceptable limit.
Thus to achieve the goal of maximizing the value, the firm should
manage its trade credit.

✔ Its purpose is to push up sales and ultimately profits by allowing certain credit
to the potential customers who otherwise may find it difficult to make cash
purchases.
✔ Granting of credit and its management involve costs.

To maximize the value of the firm, these costs must be

controlled. These thus include the credit administration

expenses, b/d losses and opportunity costs of the funds
tied up in receivable. The aim of credit management

should be to regulate and control these costs, not to

eliminate them altogether. The cost can be reduced to zero,

if no credit is granted. But the profit would be foregone on
the expected volume of sales arising due to the extension
of credit.
 Main Goals of Receivable Management
✔ Obtain the optimum volume of sales
✔ Increase profits
✔ Meet competition

Some other objectives include:

• Maintain an optimum level of investment in receivables
• Keep down the average collection period
• Control the cost of credit allowed and to keep it at the minimum possible level
CREDIT MANAGEMENT

In order that the credit sales are properly managed, it is necessary to

determine following factors:

1. Credit Policy
2. Credit Evaluation of Individual Buyers
3. Credit Sanction Decisions
4. Control and Monitoring of Receivables
CREDIT AND COLLECTION
POLICIES

• First step in the direction of an efficient receivables

management
• The Top Management or the Chief Executives take these policy
decisions in consultation with the financial and marketing executives.
 Credit Policy
✔ The first stage of credit sales is to decide policy in which the most
important variable is whether credit sales should be made or not and if
yes to what extent.

i.e. What percentage of sales should be done on cash and what

percentage on credit.
Factors affecting Credit Policy

• 1. Credit Standards

• 2. Credit Period
• 3. Cash Discount
• 4. Collection Policy
 Credit Standards
• A business enterprise should allow credit only to those customers who
constitute good credit risk.
• Efficient management of credit policy aims not only at maximizing sales, but also at
minimizing losses on account of bad debts and reducing other costs consequent upon
extension of credit.
• Investigating potential customers before extending credit is an important step though there
is no sure guarantee against loss.
• FIRM CREDIT INVESTIGATION:
• Character (reputation of customer)
• Capacity to pay on time
• Capital
• Collateral (Security Offered)
Credit Period
• The time duration for which credit is extended to customers
• During this period, the customer shall pay the amount
overdue
• Varies from industry to industry
Cash Discount
• Credit terms include the length of the period and the discount given.

• Firms generally grant cash discount to induce a customer to make payment before the expiry of
credit period.
• Two benefits of offering cash discounts:
• 1. It attracts new customers who considers discount to be a type of price reduction.
• 2. The discount causes a reduction in the average collection period since some customers
pay more promptly in order to take advantage of the discount.
Collection Policy
• The collection policy should aim at accelerating collection from slow-paying
customers and reducing bad debt losses.

• Refers to the procedures followed to collect accounts receivable, when after the
expiry of the credit period, they become due.

• Collection of receivables may consist of the following:

✔ Monitoring the state of receivables.
✔ Dispatch of polite letters to customers reminding them that the account is
overdue.
 That’s all for today ☺
See you next meeting!