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Lesson 6 - Account Recievable
Lesson 6 - Account Recievable
Lesson 6 - Account Recievable
MANAGEMENT
September 2, 2017
Group 6
Jonic Par
Kristine Raule
Group 6:
Accounts Receivable Management
LEARNING OBJECTIVES
• AR Management Definition and Terms
• Importance of Accounts Receivable Management
• What is “DSO”?
• Significance And Purpose Of AR Management
• Key areas of AR Management
• Assessing Credit worthiness
• Collecting Cash
• Designing Sales and Credit Terms
• AR Flow Chart
• Sample of Actual AR management
Group 6:
Accounts Receivable Management
Accounts receivable is defined as “debt
owed to the firm by customers arising from sale
of goods or services in the ordinary course of
business”.
AR Management Definition and Terms
• Account Receivables Management refers to the set of policies, procedures, and
practices employed by a company with respect to managing sales offered on credit.
• It encompasses the evaluation of client credit worthiness and risk, establishing sales
terms and credit policies, and designing an appropriate receivables collection process.
• Accounts receivables are found on the balance sheet of a company, and are
considered a short-term asset.
• They are the one of the backbones of sales-generation, and thus must be managed to
ensure they are eventually translated into cash-flows.
• A company that fails to efficiently convert its receivables into cash can find itself in a
poor liquidity position, crippling its working capital and facing unpleasant operational
difficulties
Group 6:
Accounts Receivable Management
Importance of AR Management
• Determining the customer’s credit rating in advance
• Frequently scanning and monitoring customers for
credit risks
• Maintaining customer relations
• Detecting late payments in due time
• Detecting complaints in due time
• Reducing the total balance outstanding (DSO)
• Preventing any bad debt in receivables outstanding
Group 6:
Accounts Receivable Management
What is 'Days Sales Outstanding - DSO'
• A low DSO value means that it takes a company fewer days to collect its
accounts receivable. A high DSO number shows that a company is selling
its product to customers on credit and taking longer to collect money.
Group 6:
Accounts Receivable Management
Daily Sales Outstanding
For example, suppose that during the month of July, Company A made a total of $500,000 in credit sales and
had $350,000 in accounts receivable. There are 31 days in July, so Company A’s DSO for July can be calculated
as:
With a DSO of 21.7, Company has a very short average turnaround in converting its receivables into cash.
Generally speaking, a DSO under 45 is considered low; however, what qualifies as a high or low DSO may often
vary depending on business type and structure.
For example, a DSO of 40 may still cause cash flow problems for a small or new business that has little available
capital. Because of the lower earnings that often accompany small or new businesses, such businesses often
rely on obtaining their accounts receivable quickly in order to cover ff:
• startup costs,
• wages,
• Overhead
• other expenses.
If they cannot collect payments quickly enough, they may struggle to meet these costs. On the other hand, a
DSO of 60 may cause few issues for a large and well-established corporation with high available capital. Though
the company could likely improve its earnings by reducing its DSO and thereby maximize its potential to
reinvest earnings, it is unlikely that the company will need to trim salaries or cut other costs in order to make
ends meet.
Group 6:
Accounts Receivable Management
Significance And Purpose Of Receivable
Management
The basic purpose of firm's receivable management is to determine effective credit policy that increases
the efficiency of firm's credit and collection department and contributes to the maximization of value of
the firm. The specific purposes of receivable management are as follows:
4. To formulate the credit terms in such a way that results into maximization of sales revenue and still
maintaining minimum investment in receivables.
6. To maintain a trade off between costs and benefits associated to credit policy.
Group 6:
Accounts Receivable Management
KEY AREAS OF ACCOUNTS RECEIVABLE MANAGEMENT
Group 6:
Accounts Receivable Management
ASSESSING CREDITWORTHINESS
• bank reference
• trade reference
• credit rating/reference agency
• financial statements
• information from the financial media
• visit
Group 6:
Accounts Receivable Management
COLLECTING CASH
• monthly statements
• chasing letters
• chasing phone calls
• personal approach
• stopping supplies
• legal action
• external debt collection agency
Group 6:
Accounts Receivable Management
Benefits of AR Management
• Increase Sales – Providing goods or services on
credit expand sales by retaining old customer
and attracting new customers.
• Market Share Increased - When the firm is able
to retain old customer and attracting new
customer automatically market share will
increased.
• Increase Profit - increased sales , leads to an
increased profit
Group 6:
Accounts Receivable Management
Distributor AR Flow Chart
Customer
Order
Provide Check AR
Invoice copy
for another Due AR must
AR be settled
Payment of
Deliver Goods
AR
Group 6:
Accounts Receivable Management
PROJECTED GSV FOR FY 17-18 255,234,813
Group 6:
Accounts Receivable Management