What is receivable management?

Account receivables refer to the outstanding invoices or money which is yet to be paid by your
customers. Until it is paid, such invoices or money is accounted as accounts receivables. Also known
as bills receivables. You need cash all the time to keep your business running smoothly and ensuring
the accounts receivables are paid on time is essential to manage cash flow efficiently.

And as the term suggests, management of your accounts receivable is called receivable
management. Basically, the entire process of defining the credit policy, setting payment terms,
sending payment follow ups and timely collection of the due payments can be defined as receivables
management. Management of Receivables is also known as:

Payment Collection

Collection Management

Accounts Receivables

Importance & benefits of receivable management

Management of receivables refers to planning and controlling of debt owed to the customer on
account of credit sales. In simple words, the successful closure of your order to sales is determined
only when you convert your sales into cash. Till your sales are converted into cash, you need to
manage ‘how much you need to receive? from whom? And when?

To do this, you need accounts receivables management, popularly known as a credit management
system in place.

Another reason, accounts receivables are one of the key sources of cash inflow and given the volume
of credit sales, a large amount of money gets tied-up in accounts receivables. This simply implies
that so much of money is not available till it is paid. If these are not managed efficiently, it has a
direct impact on the working capital of the business and potentially hampers the growth of the
business.

Importance

A major part of any company’s assets is Accounts Receivable. It helps in generating cash inflow in the
books of the company. It is a crucial thing because the company’s future cash flow is affected by it.
The company provides credit facility to the customers to ease the transaction process and establish a
strong credit relationship with the customer. It helps in getting better deals for the company. It helps
attract investors because an investor will be able to check the company’s collection efficiency and
become interested in investing if it’s a good record.
Accounts receivable management can make or break a business. When there is a delay in payment
from the customer’s end, a company will probably be a few bucks away from a cash flow shortage,
i.e., when more money flows out than the amount of money flowing in. Eventually, the business is
unable to pay its own bills and carry on its functions smoothly.

Experts have agreed that about 90% of businesses shut down suddenly are because of faults in their
cash flow system. Mismanaged accounts receivable often causes these devastating cash flow
shortages.

Avoiding such mishaps is important for every business; hence they must efficiently manage their
accounts to improve the working capital and avoid any disastrous cash flow shortages.

Every business wishes to buy low and sell high. However, they risk losing everything with poor
accounts receivable management in the last stage, i.e., payment. More than half of the cases of
bankruptcies have occurred due to a poor command over accounts receivables. It involves more
than just reminding the customer to pay on time. It also consists of finding out why the customer has
not paid and also the loopholes in the system because of which the customer has skipped the step.
Was it because of any administrative error, or was it because any product or service was not
delivered?

Proper management of accounts receivables of a business is a process consisting of the following

elements:

Determining the customer’s credit rating in advance

Frequently scanning and monitoring customers for credit risks

Maintaining a good customer relation

Detecting late payments in due time

Detecting complaints in due time

Reducing the total balance outstanding (DSO)

Preventing any bad debt in receivables outstanding

1. Introduction to Receivables Management

The sale of goods on credit and the deferment of payment by customers create receivables in a firm.
The receivables include both accounts receivable and bills receivables.
The customers who purchased the goods and services from the firm on credit basis and have not
paid the amount till the end of accounting period are known as debtors or accounts receivables. The
bills (or promissory notes) drawn by the seller and accepted by the customer in exchange of credit
sales are known as bills receivables.

According to Hampton, “The receivables are asset accounts, representing the amount owed to the
firm as a result of the sale of goods or services in the ordinary course of business.”

The receivables are part of current assets of the firm. The credit policy of the firm decides the
amount of receivables in the firm. The amount of receivables in the firm affects its requirements for
the working capital. Thus, the credit policy and management of receivables in the firm becomes
significant.

The finance manager of the firm should analyse costs and benefits associated with the receivables
when deciding the investment in receivables.

2. Meaning of Receivables Management

The term ‘receivables’ refers to debt owed to the firm by the customers resulting from sale of goods
or services in the ordinary course of business. These are the funds blocked due to credit sales.
Receivables are also called as trade receivables, accounts receivables, book debts, sundry debtors
and bills receivables etc. Management of receivables is also known as management of trade credit.

Motives or Purposes of Maintaining Receivables:

i) Sales Growth Motive

The main objective of credit sales is to increase the total sales of the business. On being given the
facility of credit, customers who have shortage of cash may also purchase the goods. Therefore, the
prime motive for investment in receivables is sales growth.

(ii) Increased Profits Motive

Due to credit sales, the total sales of business increase. This, in turn, results in increase in profits of
the business.

(iii) Sales-Retention or Meeting Competition Motive

In business, goods are sold on credit to protect the current sales against emerging competition. If
goods are not sold on credit, the customers may shift to the competitors who allow credit facility to
them.

3. Objectives of Receivable Management

The receivables management is also known as credit management. The objective of receivables
management is to promote sales and profits of the firm up to the level where the return on
investment in further receivables becomes less than cost of additional investment in receivables.

The objective of receivables management should be helpful in achieving the firm’s goal of
maximising shareholders’ wealth. Thus, the finance manager has to decide the optimal credit policy
of the firm which gives maximum return on investment in receivables.

To achieve this objective, the finance manager has:

1. To decide the optimal sale of goods and services,

2. To control the cost of receivable, cost of collections, bad debts and other administrative expenses.

Scope Of Accounts Receivable Management

Here are some points that can help you understand the scope of receivable management:

Credit evaluation

Credit evaluation is the process where finance managers study and examine if a specific customer is
eligible for the credit. It can allow you to check the creditworthiness of potential customers before
sanctioning any amount to their accounts. Credit evaluation can help in minimising the risk of bad
debts. In this step, you can collect all the essential credentials from the customer's side. With the
help of credit evaluation, you can determine the borrowing and repaying ability of a customer.

Credit control

Controlling credit functioning can play a significant role in the survival of a business. Receivable
management may help you build a proper structure to manage all the credit functions of a business.
You may keep track records and documentation of each step involving credit sales and ensure the
credit is under control.

Maximise Profit
Accounts receivable management can also be helpful in maximising the overall profit ratios for firms
lending credit to their clients. It may allow businesses to provide credit facilities or services to
potential customers. In addition, it also helps in increasing sales volume. If more customers find it
easier to buy goods on credit through a firm, it may increase the overall sales volume.

Better competition

When a business offers good credit services, it may gain the attention of other top leading
companies. Efficient receivable management may allow such companies to implement effective
strategies to remain competitive in the market. It can be a great way to offer credit facilities to
customers depending on their requirements and capabilities.